Proceedings of the Standing Senate Committee on
National Finance
Issue 39 - Evidence - May 8, 2013
OTTAWA, Wednesday, May 8, 2013
The Standing Senate Committee on National Finance met this day at 6:45 p.m., in a public meeting, to study the subject-matter of Bill C-60, An Act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures, introduced in the House of Commons on April 29, 2013.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, tonight we will continue our study of the subject-matter of Bill C-60, An Act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures, introduced in the House of Commons on April 29, 2013.
[English]
Honourable senators, yesterday we began our study of Bill C-60, the budget implementation act, and that session took us through to the end of clause 31. If honourable senators want to get their bills out, we will be starting at clause 32 this evening. We are pleased to welcome back the witnesses. In fact, you might not even have gone home. We are very pleased that you are here in any event.
Honourable senators, from the Department of Finance Canada we have Ted Cook, Senior Legislative Chief, Tax Legislation Division; Sean Keenan, Director, Tax Policy Branch; and Geoff Trueman, Director, Business Income Tax. From the Department of Justice, we welcome back Sandra Phillips, Associate Assistant Deputy Attorney General, Assistant Deputy Attorney General's Office.
We do not normally have introductory remarks. We can go right into the first clause, which is 32. Mr. Cook, do you want to take the lead?
Ted Cook, Senior Legislative Chief, Tax Legislation Division, Department of Finance Canada: Thank you, Mr. Chair. As I believe you mentioned at end of the last meeting, from clause 32 on we are just talking about the Income Tax Regulations as opposed to amendments to the Income Tax Act or the Tax Court of Canada Act. I would discuss clauses 32, 33 and 34 together. Previously, we had discussed the repeal of the international banking centre rules; those main rules are found in section 33.1 of the Income Tax Act. Clauses 32, 33 and 34 deal with consequential amendments in the Income Tax Regulations. The part of the Income Tax Regulations where these provisions are deals with the allocation of income between provinces to allow provinces to tax income earned by taxpayers. Clauses 32 and 34 simply repeal provisions that require income that is exempt under the international banking centre rules to be included in income for the purpose of determining overall income and income earned in a province.
Clause 33 is a consequential amendment to take a deeming reference that was in subsection 413(1), which provides that when a corporation is non-resident, references to taxable income mean the corporation's taxable income earned in Canada. Normally we make a distinction between taxpayers that are resident in Canada — they earn taxable income — and the taxable income that is sourced in Canada is taxable income earned in Canada. Those are clauses 32, 33 and 34.
The Chair: We do not normally see regulations before this particular committee. Perhaps you or Ms. Phillips could explain to honourable colleagues why we are seeing regulations as well as sections of the act.
Mr. Cook: I can speak to the regulations. You are quite right. It is open to the government to use a regulatory process as opposed to including in a bill. Changes to regulations, of course, can be included in regulation that goes through Parliament.
In terms of the regulations that are here, they are either consequential and part of an amendment, a measure being introduced in Budget 2013 or they have been included in the bill. For the most part, the regulations are specifically part of the measures, so it makes sense to group them together. The one exception to that would be the manufacturing and processing. In fact, that starts with clause 35, the next one we will talk about.
The Chair: Leads you right into it.
Mr. Cook: Exactly. Obviously, one of the more important budget measures is the extension of the accelerated capital cost allowance for manufacturing and processing equipment.
The classes, if you will, that determine capital cost allowance are set out in the regulations and are scheduled to the regulations. A determination was made to include this here as an important budget measure and, therefore, appropriately part of the legislation as opposed to sending it separately through the regulatory process.
The Chair: Thank you.
Mr. Cook: On that note, clause 35, when we talk about the M and P and the accelerated capital cost allowance, two clauses are impacted: clause 35 and clause 40. Clause 35 allows an election for taxpayers who would be otherwise eligible for the accelerated capital cost allowance. However, because the equipment involved is high-efficiency energy equipment, they fall into a different class in the capital cost allowance system, capital cost allowance class 43.1 or 43.2. Clause 35 just refers to a provision that allows a taxpayer to choose if they wish to include their manufacturing or processing machinery or equipment in class 29.
The Chair: Is class 29 accelerated?
Mr. Cook: Class 29 is eligible for the accelerated capital cost allowance. The capital cost allowance rate allowed under the accelerated capital cost allowance is 50 per cent per year on a straight-line basis. Without this measure, the class or the rate that would normally apply is 30 per cent on a declining balance basis. That is clause 35.
The Chair: Okay, thank you.
Mr. Cook: Clause 36 is a consequential amendment relating to the measure we talked about with respect to Canadian Forces members and police officers deployed on operational international missions. As I indicated, the existing rule in the act provided that missions had to be prescribed. That prescription is done in Part LXXV of the regulations with the change in approach to designation. The prescription of regulations is no longer required, so this part of the regulation will not apply in respect of missions initiated after September 2012, so it will not affect the currently prescribed missions.
Then turning to clauses 37, 38 and 39, these again are all consequential to the international banking centre measure, and all it does is take out references that are relevant for the international banking centre rules. There are just a number of deletions in the provisions referred to in clauses 37, 38 and 39.
The Chair: My recollection from yesterday is the international banking centre sections were removed because they were not being used.
Mr. Cook: That is exactly right. The last year that anyone had made a claim for the exemption was 2007.
Then we go to clause 40, which is the operative clause to allow the extension of the accelerated capital cost allowance for an additional two years to property and equipment acquired before 2016.
Then the final clause in Part 1 is simply a coordinating amendment. As honourable senators may be aware, Bill C-48 is currently before the house and makes a number of technical amendments to the Income Tax Act. One of those amendments is to section 82 of the Income Tax Act, which is also amended in this bill as part of the dividend tax credit measure. This clause simply ensures that both amendments will operate regardless of which bill receives Royal Assent first.
[Translation]
Senator Bellemare: Clause 40 has to do with the accelerated capital cost allowance. Can you please remind us what the expected cost of this measure is? I believe it is included in the budget.
[English]
Geoff Trueman, Director, Business Income Tax, Department of Finance Canada: The cost of this measure is $1.4 billion over four years.
[Translation]
Senator Bellemare: We are expecting a lot of investments, then. That is good.
[English]
The Chair: What do you mean over four years? Will it be cumulative over four years? That is what it will be at the end of four years counting each of the years and adding them up?
Mr. Trueman: Yes, that is set out in the fiscal track in the annex to the budget. The costs start in 2014-15, and through 2017-18, the total over those four years is $1.4 billion.
The Chair: It will not sunset after four years, will it?
Mr. Trueman: The measure itself, the accelerated capital cost allowance, is for two years, so it is extended to assets acquired before 2016, so for assets purchased in 2014 and 2015. Then it would terminate at that time as currently drafted. The cost continues because the assets would be written off. If you acquire a machine in 2015, you would be writing it off at the accelerated rate in those future years.
The Chair: Are there further questions on Part 1?
[Translation]
Senator De Bané: My question has to do with a topic that is peripheral to what we were just discussing.
[English]
Mr. Cook, you are the senior legislative chief of the Tax Legislation Division. What is the difference of responsibility between your position and the one of the chief legal counsel at Revenue Canada Agency? What does each position do compared to the other? You do the policy; he is in charge of interpreting that law? You are the chief in that department; he is the chief legal counsel in the other department. Can you explain to us the differences in responsibility? I am sure it is different for each.
Mr. Cook: I can speak to certainly my role, and perhaps Ms. Phillips can make some comments on the role of tax law services and how they support the Canada Revenue Agency.
As senior legislative chief, my primary role is chair of the interdepartmental legislative review committee. At the Department of Finance Tax Policy Branch, our primary role is to develop policy. The divisions headed up by Mr. Trueman and Mr. Keenan are populated largely by economists. The division I work in is populated largely by accountants and tax lawyers.
Our job is more on the technical analysis side of the law, and my principal role and that the people I work with is to actually draft the income tax legislation in accordance with the policy decisions made, and also to prepare technical amendments to ensure the tax law stays within the policy.
The committee I chair will have representatives from our own division of tax lawyers and accountants. There will be representation of the economists from the other divisions. As well, we will have representatives usually from the Department of Justice who work within the Department of Finance. We have a tax counsel division, which provides support and liaison to ensure that our work with the Income Tax Act conforms to current Department of Justice drafting standards. As well, we have CRA people there to ensure a proper reflection of what CRA sees on the ground and what will be able to be administered from that perspective. As well, we provide support to CRA in terms of responding to adverse court decisions and the GAAR committee, which is the General Anti-Avoidance Rule committee.
Our role is at the policy end and in developing legislation, and of course, a lot of work goes on to support legislation's passage through both the house and the Senate.
The CRA and the legal people who work with them are more directed towards actual support of the CRA in terms of assistance in the audit process. There is a whole group that assists the CRA in their developing their own positions and auditing.
Senator De Bané: Does the CRA consult with you in response to a query of their department, such as should we apply this measure? Do they come back to you and say, ``We want to interpret it this way; are you okay with that?''
Mr. Cook: They do. There is a clear division in the sense that the CRA is the ultimate administrator of the Income Tax Act, but the interpretation is potentially open. Certainly we have a lot of dialogue with the CRA on a continuous basis as to what interpretation perhaps conforms best with the policy decisions that underpin the Income Tax Act.
As well, the CRA is constantly bringing to us issues where the law may say one thing, but they are not certain that it fits the underlying policy. They will bring that to us, and we may confirm that it does conform to the policy, or in other cases we will decide that perhaps a change is warranted.
Certainly with last year's budget and this year's budget, if you will recall last year, we made changes with respect to retirement compensation arrangements, that kind of thing. Those were transactions that the CRA had seen in the audit cycle, and they brought them to us to be sure we wanted this kind of thing to be going on.
Senator De Bané: It is very interesting to see the interactions among Finance, Justice and the CRA.
The Chair: Thank you for helping us all understand that a little better, Mr. Cook.
I have one other question in my mind that you might be able to clarify, and that is with respect to the accelerated capital cost allowance we have just talked about. Maybe Mr. Trueman is the right person to ask.
With capital cost allowance, you are writing off the asset over time. Accelerated just means you are doing it more quickly, but is the impact over the long term not the same from the government's point of view, except that the money is just taken off income tax sooner with an accelerated?
Mr. Trueman: There are two impacts at play. As you correctly note, capital cost allowance, whether on a declining balance or a straight line and whether you accelerate that rate, the ultimate disposition is that the full amount is written off over time. The acceleration means that the amount will be written off more quickly. That does have an impact on the government's fiscal framework in that those deductions are taken sooner and thereby reduce the corporate taxable income base. There is a timing difference for sure, and there would also be the net present value or the cost of funds over time to the extent that a dollar realized further down the road is less costly and that dollar given up now is more costly.
The Chair: When you explained to us earlier over four years that impact of $1.4 billion, that is the impact by virtue of an accelerated capital cost allowance. However, the $1.4 billion would be taken off over a longer period of time if we did not have the accelerated. Is that right?
Mr. Trueman: That is right. That $1.4 billion is measured against the benchmark of the 30 per cent declining balance, so you take the difference between those two systems.
The Chair: I think I understand it better now.
I think this may be the end of the pleasure we have had of having you here to talk to us, unless you want to stay on and deal with excise tax and those other items.
Mr. Cook: I am sure you will find the sales tax very interesting.
The Chair: Thank you very much, and we look forward to the next time we may get together. It was very helpful.
We will now go on to Part 2 of Bill C-60, which begins at clause 42. We are dealing with measures relating to sales and excise tax and excise duties. We welcome back, because he has been here with us several times previously, Pierre Mercille, as well as Lucia Di Primio and Carlos Achadinha. Thank you very much for being here.
Mr. Mercille, you have the floor, if you want to start us at clause 42.
Pierre Mercille, Senior Legislative Chief, GST Legislation, Department of Finance Canada: Good evening. Part 2 of the bill deals with the implementation of measures that relate to sales, excise taxes and excise duties. As you mentioned, we will start on clause 42.
This amendment is similar to the income tax amendment that was described in clause 21 of Part 1 and is made to ensure consistency in respect of administrative provisions across various tax statutes. The amendments deal with the issuance by the CRA of a requirement to a third party to provide information for the purposes of verifying compliance by unnamed persons.
Similar to the income tax amendments, this amendment eliminates the ex parte aspect. Instead, the CRA will have to give notice to the third party when it initially seeks a court order from a judge of the Federal Court. The amendment is in the non-GST/HST portion of the Excise Tax Act and deals with the taxation of certain fuel and other excisable products. There will be two similar amendments later in Part 2.
The Chair: We heard yesterday that these changes have been vetted with the profession and the tax act. Is that part of this legislation?
Mr. Mercille: No. You are referring to, I believe, the changes to the Tax Court of Canada?
The Chair: Yes.
Mr. Mercille: These are not the Tax Court of Canada. This is when the CRA seeks information from a bank about unnamed persons. The previous legislation provided that CRA must get a court order to do that. However, the current legislation says that CRA can obtain a court order without the presence of the bank. Basically, this right of the CRA to go without the presence of the third party is being removed. Now CRA will, according to the rules of the Federal Court, notify the third party, the bank, so that the bank will have the opportunity to make any representations they want to make before the court order is issued.
The next clause is 43, and it is linked with clause 44, which follows. Clause 43 adds new section 157 to the Excise Tax Act to simplify the compliance in respect of transactions between an employer and a pension plan trust in the case where an employer performs activities related to the pension plan trust of employees. For example, an employer can purchase something to resupply to the pension plan trust. He can purchase investment management services and resupply them to the trust. An employer can also use its own resources to supply something to the pension plan trust. The employer can perform administrative functions or lend office spaces for pension activities.
The new section 157 allows a participating employer of a registered pension plan of employees to jointly elect, with the pension plan trust, to treat actual taxable supplies by the employer to the pension plan trust as being made for no consideration.
That means there will be no tax applicable on those actual supplies. This election is intended to simplify compliance for transactions between employers and pension plan trusts. This election would be available as long as the employer properly accounts for and remits tax under the pension plan deemed taxable supply rules under the GST legislation that I will now explain briefly.
Currently under the existing GST/HST pension plan rules, when an employer acquires, consumes or uses any property or services for use in relation to the registered pension plan in which it participates, the employer is deemed to have made a taxable supply to the pension plan trust. This is not an actual supply; this is a supply deemed under the legislation. Since is a deemed taxable supply, the employer is required to basically add the tax on that taxable supply in its net tax calculation.
For example, this is the case if an employer acquires a computer and uses it for a pension plan-related activity, such as a payroll deduction.
The Chair: Would the employer not have a deduction as opposed to adding to his tax table?
Mr. Mercille: Yes. Under the normal rules the employer will purchase the computer and claim his ITC. Under the special pension plan rules, the employer will be deemed to have made a taxable supply of the service that he will provide to the pension plan. He may also do the actual supply, but he is deemed to have made a fictitious supply and he has to account for tax on that deemed taxable supply.
I will continue; it may clarify.
The Chair: I hope so.
Mr. Mercille: It is a simplification measure, so the rules have to be a bit complex.
In addition, if the employer makes a supply of a property or service to the pension plan trust, the employer must charge the regular tax on the supply he is making. For example, if the employer purchases a computer and resupplies it, he also has to collect the tax on the supply of the computer.
In the legislation right now, if an employer is required to account for tax twice, both on the deemed taxable supply and on the actual supply, the employer is allowed to make an adjustment to ensure that there is no double taxation. In order to address concerns about the complexity of the cost of having to account for the tax twice and to make a subsequent adjustment to ensure there is no double taxation in certain circumstances, the election under section 157 has been proposed as a simplification measure. This measure would simplify compliance for employers when the joint election is made as they would not have to account for tax on the actual taxable supply and would also not have to do the subsequent tax adjustments.
Senator Neufeld: That is not simple; you are right.
Senator Gerstein: That is right up there with the tax.
The Chair: That joint election should not be taken literally. Oh, my.
Senator McInnis: I thought it was just a money grab.
Mr. Mercille: This one has no effect on cost because it basically simplifies the paperwork for employers.
Senator De Bané: Mr. Chair, will we pass an exam?
The Chair: I think that last comment was the important one: It has no effect on costs.
Mr. Mercille: Yes.
The Chair: Neither the pension trust nor the government is impacted?
Mr. Mercille: No, because the process of the tax adjustment that is available makes the situation as if there was only one supply made, and not the fictitious one and the actual one.
The Chair: The employer might save by being able to make this simplified election as opposed to the paperwork.
Mr. Mercille: The employer will save on the compliance side because at the end, the tax he is remitting to the government will be the same.
The Chair: Okay.
Mr. Mercille: The next clause is clause 44.
The Chair: Another simple one?
Mr. Mercille: No, actually it is another one linked to that, so it is a bit more complex. This is also an amendment to address concerns with the complexity and the cost of complying with the pension plan deemed taxable supply rules that I just explained.
In particular, some employers have expressed concern where only a small amount of tax is at stake. This is, for example, where an employer's activity is small and they are limited to collecting and remitting pension contributions. When they are doing that, they have to self-assess tax and add to their net tax as if they made a taxable supply to the pension plan.
Clause 44 proposes a measure that allows an employer participating in a registered pension plan to be fully or partially relieved from accounting for tax under the pension plan deemed taxable supply rules. This would be the case if the employer's pension plan related activities, like deducting the contribution from the payroll, fall below certain thresholds.
An employer will be relieved from applying the deemed taxable supply rules for the fiscal year of the employer where the amount of the GST that the employer was required to account for and remit under the deemed taxable supply rules in the preceding fiscal year of the employer is less than two different amounts: $5,000 or 10 per cent of the total GST paid by the pension plan trust in the preceding fiscal year. The activity of the employer has to be small in that case.
If everything the employer does in respect of the pension plan falls below those thresholds, the employer will have to collect tax if he makes an actual supply but he does not have to self-assess. He does not have to comply with the deemed taxable supply rules.
There is an additional relief that is more limited. If an employer does not satisfy the $5,000 or 10 per cent threshold, a similar but more limited relief would be available in respect of only the employer's internal activities. This is for the inputs acquired for consumption or use by the employer in relation to the pension plan, but otherwise than to make a taxable supply to the pension plan.
An example would be the time spent by a payroll employee determining an employer's pension contribution deduction. Again, in respect of just those activities where the employer does not make an actual supply to the pension plan trust, the employer would be relieved from this self-assessment if he meets the $5,000 and 10 per cent test. However, in this case it is just in respect of those internal pension activities.
The Chair: The net effect, again?
Mr. Mercille: This one has a small cost because, as I mentioned, it must be a minimal involvement of the employer. Actually, it is too small to have a number in the budget, but there is one in theory. It is small because it is only when they have a very limited involvement in the pension plan.
Senator Callbeck: When you say small, what do you mean?
Mr. Mercille: Well, the budget says below $1 million.
Senator Callbeck: Okay.
Mr. Mercille: The next clause is clause 45 on page 38, which adds new subsection 229(2.1). This new subsection provides the Minister of National Revenue with the authority to withhold GST/HST refunds claimed by any business until such time as all the prescribed business identification information is provided.
When a business registers for GST/HST purposes, it is generally required to provide the CRA basic business identification information that includes the business operating name, the legal name, ownership details, business activities and contact information. The CRA uses this registration information to manage business accounts and to improve tax compliance, including detecting fraud. The measure will assist the CRA in authenticating GST/HST registration and will enhance the CRA's compliance activity by improving the quality of data that the CRA uses to assess compliance risk.
[Translation]
Senator Chaput: That gives the minister the power to withhold a refund?
Mr. Mercille: Yes.
Senator Chaput: Is the $100 penalty still imposed? If I am not mistaken, there is currently a $100 penalty for people who do not comply.
Mr. Mercille: The $100 penalty would apply in cases where the agency submits a formal request and the person registered does not respond to the request. A $100 fine would apply in those cases. The measure was requested by the agency, which thinks that $100 is a little outdated and ineffective. Whereas, accepting a payment is more effective for obtaining information.
Senator Chaput: I understand. Thank you.
[English]
Senator McInnis: I gather there is a problem with that?
Mr. Mercille: CRA has asked for it. It will help them to enforce compliance. Normally if CRA does not have the information they will make phone calls, but sometimes the phone number is not up-to-date or things like that, so they do not get the information. When they have to issue a refund, they issue it based on what they have, but it is not certain that it is accurate, and there is potential for fraud if you cannot verify that it is a valid, existing business and not just a fake business that is making fake refund claims and things like that.
If they can hold it until they get all the information to identify the person getting the refund, it will improve their capacity to detect fraud.
Senator McInnis: Thank you.
Mr. Mercille: Clause 46 is another amendment that deals with the CRA information requirement regarding unnamed persons. It is also an amendment that is made to ensure consistency across various tax statutes. In this case it is in respect of the GST/HST.
I will group clauses 47 to 50 because they all relate to GST/HST treatment of health care services. These provisions propose two amendments. The first amendment deals with the GST/HST treatment of home and personal care services. There is currently an exemption in the GST/HST legislation that is provided for publicly subsidized or funded homemaker services such as cleaning, laundering, meal preparation and child care when these services are rendered to an individual who requires assistance in his or her home due to age, infirmity or a disability. The first amendment proposes to expand this GST/HST exemption to include publicly subsidized or funded personal care services such as bathing, feeding and assisting with dressing and taking medication.
Senator McInnis: It is a matter of whether it is just subsidized or it is government provided?
Mr. Mercille: It has to be publicly subsidized or funded.
Senator McInnis: Or support?
Mr. Mercille: I am not sure what you mean.
Senator McInnis: You said that there are currently two types.
Mr. Mercille: Right now what is covered is what is referred to in the legislation as homemaker services, which are services such as cleaning, laundering, meal preparation and child care.
Senator McInnis: Provided by the government?
Mr. Mercille: It can be a private provider as long as the provision is subsidized or funded, at least in part, by the government. It is expanded to add more activities to this program, such as bathing, feeding and assisting with medication.
Senator McInnis: Exactly, because there are a number of companies that are partially subsidized.
[Translation]
Senator Chaput: Would these measures apply to services provided by a doctor if the doctor has to, say, make a house call because a senior cannot get around? Would it apply to those services if there is a cost?
Mr. Mercille: In general, this does not include services provided by doctors, but rather by assistants to the recipients or work like that; it is for cleaning, washing and so on. It is generally not for doctors because doctors would charge too much per hour for that.
Senator Chaput: Is it true that this measure will be retroactive to March 22, 2013?
Mr. Mercille: Yes, the day after the budget was passed.
[English]
Senator Callbeck: Approximately how much will that cost?
Carlos Achadinha, Legislative Chief, Sales Tax Division, Public Sector Bodies, Department of Finance Canada: There is an estimate in the budget. It is approximately $5 million annually.
The Chair: That would be $5 million in HST?
Mr. Achadinha: Forgone. As we are expanding the benefit right now and the scope of the exemption, more people will benefit from the exemption and therefore it will be forgone.
Senator Bellemare: You do not have any idea about the total amounts for home care?
Mr. Achadinha: I do not have it here. In the tax expenditures we do a report that indicates a variety of costs of different expenditures, and it may be there. It may also just be covered with general relief. In many cases home care is considered to be an extension of a health care service. It helps people to maintain their life at home. When the GST was introduced, it was decided there would be an exemption for basic health care services and it was considered that home care would be an important component of that health care and that an exemption would be extended to those home care services that Mr. Mercille has just listed.
Over time the types of services that provinces and territories are providing has been expanded, and it came to our attention that some of those services were not explicitly covered in the definition as we had outlined for homemaker services. Therefore, the intent of this provision is to expand that to cover some of those services that provinces and territories are providing on a subsidized or direct basis.
[Translation]
Senator Bellemare: Certainly, it will increase as the population ages.
Senator De Bané: Mr. Mercille, I would like to ask a question about the sales tax and the harmonized tax. For example, what are the current regulations for a solely Internet-based business when it sells goods to Canadians in the 10 provinces and territories, and so on? Does it also have to collect the sales tax and GST for each province? How does that work?
Mr. Mercille: When a company registers for the GST, the person is automatically registered for the HST, as well. The person must comply with supplies of property legislation. In the example you gave, the person may be located in any province; if the person delivers goods, the general rule is that the tax for the address where the goods are shipped is the tax that applies. The business must know that Ontario has HST of 13 per cent and that, in Alberta, only 5 per cent GST applies.
Senator De Bané: Do Internet-based businesses comply with the act and do they collect these taxes for each territory?
Mr. Mercille: I think the rules are generally understood. Basically, it is simply charged at a different rate. Generally, the tax is calculated automatically by their accounting program when they enter the address for billing.
Senator De Bané: It is not yet in effect in the United States.
Mr. Mercille: The United States does not have a national sales tax like Canada does. There is no value-added tax in the United States. There is a multitude of taxes at the state level and even at the municipal level. There are a lot of different little taxes. They are not harmonized.
Senator De Bané: It seems that they will soon adopt legislation that would force businesses selling over the Internet to collect the tax depending on the state.
[English]
Mr. Achadinha: There is an act going through the U.S. right now that has to do with state taxes. The state will levy taxes, state sales taxes. The U.S. is looking at putting together some rules with respect to how you deal with people who sell things from one state to another. An act has been proposed. It has gone through the Senate and still needs to go through other houses and get other approvals, but it is trying to address some of those interstate sales and trying to have some general rules that apply with respect to registration and what you need to do in terms of having consistent rules and application rules and collection rules.
Senator De Bané: On that point, we are ahead of them?
Mr. Achadinha: As Mr. Mercille mentioned, we have the GST, which is a national tax, and with respect to those vendors who are part of the GST, if they are also part of the HST, when they register, they register with respect to their national activities.
[Translation]
Senator Chaput: May I give you an example to make sure I have understood correctly? Let us say that a small business, Molly Maid, cleans the home of a disabled couple. Am I correct in understanding that the businessperson, who is providing housecleaning services, will not have to charge tax to these people obtaining the service? These people are going to pay the businessperson, but not have to pay the tax?
Mr. Mercille: In cases where the company provides this kind of service, if neither the company nor the service is subsidized, the service is taxable; it is like a normal cleaning service. However, if the company provides its services to this senior or person who has some kind of health problem and the government pays for a portion of the service, the company can then provide the services tax-free.
In addition, in cases where the individuals decide they want to receive more hours of service than the government has granted, if a portion of the service is already subsidized and another portion is added, the other portion will receive the same tax treatment and will therefore be exempt.
Senator Chaput: So, it does not apply to small businesses?
Mr. Mercille: The question is whether the service is subsidized and whether the person needs it because of some condition.
Senator Bellemare: That means that subsidized businesses are often social economy enterprises rather than private for profit companies?
Mr. Mercille: It can be any business the government may have chosen.
I would like to add something. I do not know whether your question had to do with a person who works as a cleaner here and there. Keep in mind that the GST threshold for small suppliers is $30,000 in sales a year. If they do not reach that amount, they are not required to charge tax.
[English]
The second amendment that deals with health care deals with services provided solely for non-health care purpose. Under the GST/HST, services provided solely for non-health care purposes, even if supplied by a health care professional, are not considered to be basic health care and are not intended to be eligible for the exemption.
The second amendment clarifies that the GST/HST applies to reports, examinations and other services not performed for the purposes of protection, maintenance or restoration of the health of a person or are not provided for palliative care purposes. For example, reports, examinations and other services that are performed solely for the purpose of determining a liability in a court proceeding or solely under an insurance policy are considered taxable supplies.
The amendment also clarifies that supplies of property or services in respect of taxable reports and examinations, or other services, would also be taxable. For example, this can be the charge for an X-ray or a lab test in relation to a taxable examination. These would also be taxable.
Senator Chaput: Are they presently taxable?
Mr. Mercille: They may be exempt presently, and because they are for non-health care purposes, with the amendment it would become taxable if they are performed for non-health care purposes.
Senator McInnis: Could you give an example of that?
Mr. Mercille: As an example, you may have an injury and are being treated, and then for legal purposes you are asked to get an additional evaluation for the purpose of court proceedings. The only purpose you are getting the report for is that. In this case, that report, even if made by a doctor to you, would be taxable.
Senator McInnis: What if that report were being done for my doctor, my personal doctor?
Mr. Mercille: If you go see your doctor because you have an injury and he is treating you and you need to have X- rays because he knows you have a broken leg but does not know the extent, now you are X-rayed and the doctor treats you. This continues to be exempt. If you use the X-ray later because you have a copy and your lawyer asks for a copy to prove you had an injury, it does not make the report taxable, because it was supplied to you for the purpose of health care treatments.
If a few months or a year later you are asked to have an X-ray for the purpose of a court proceeding, the amendment makes it non-exempt from GST and it should be taxable.
The Chair: Why does all of this legislation get more and more complicated? Every one of these rules we pass just makes it that much more complicated for whoever is calculating the taxes. This may be a health care tax, this may be not, and you will have to get someone to swear you had this X-ray for a sore leg and not for the court case. That starts to make all of this extremely complicated for, in many cases, small businesses or individuals.
Senator McInnis: If I may add to that, I do not know who dreams these things up. It is not the politician. I do not know who it is, but there must be people thinking this up.
The Chair: However, here we are passing these things.
Senator McInnis: You either get it from the consumer or the public because there is a problem or people are asking for it or someone in CRA dreams these things up. There must be people working on this on a regular basis.
Mr. Mercille: In the case of what is referred to as independent medical examination, medical examinations not by your treating doctor but by an insurance company or a lawyer who asks you to do those things, since the beginning the CRA has taken the position and it was the intent that these would be taxable because they are not for the purpose of treating you; they are for another purpose. There have been court cases that basically expanded the exemption, and that is why over time we have to bring the exemption back to its original intent.
Mr. Achadinha: The long-standing policy intent is that there is an exemption for basic health care. The exemption is intended for treating people on a medical basis. Over time, pressure was put on it from different sorts of health services, those that had no relation to medical treatment or any health purpose. That was eventually brought before the courts, and the courts had an interpretation that looking at the general scope of the law and some of the provisions, those type of reports, as Mr. Mercille said — in the CRA's position, the government's long-standing position was that those independent medical exams, those reports with no health care purpose, would not be entitled to the exemption and they would be taxable. The decision was that they qualified for exemption and they were entitled to the exemption, so this comes back and puts the legislation in line and consistent with the ongoing and original policy intent that there is an exemption for basic health care services. The line is that if there is a health purpose, you should be entitled to relief, an exemption.
The Chair: The purpose of these exemptions is laudable. You say we are doing this because it is a subsidized service or the person who is getting the service is partially subsidized, it is a health care thing. However, think of the court costs, the lawyers' costs and the accountants' costs that are all put into this because you are trying to do something good, and think how much you could save and how many points you could bring down the HST or the GST if we just said ``no exceptions, none whatsoever.'' We would be gone home by now; we would not be doing all of this.
Senator Callbeck: How much will the government roughly gain by doing this?
Mr. Achadinha: The estimate is approximately $1 million per year.
Senator Chaput: Who is responsible for ensuring that the tax is being paid? Is it the doctor or is it the patient? If I go to my doctor not for a medical reason but for another reason and I do not tell them, who has the ultimate responsibility?
Mr. Mercille: The doctor treats you when you go see him. He does that for the purpose of treating you or not treating you, whatever, and that will make a difference. However, the obligation under the legislation is the same as going to the store; you go to the store and they have the obligation to collect tax. You have the obligation to pay it. The party that has the obligation to collect the tax and remit it to the government is the supplier of the product or service, which would be the doctor or the clinic in your case.
Senator Neufeld: There is a budget of I think over $250 billion and revenue of $1 million. What is the net out of the $1 million? Is it a couple hundred thousand bucks? Someone has to administer this somewhere, such as in the tax department. I do not know who administers it, but someone must do so to ensure all of this happens. It would be interesting to know what the net would be for $1 million.
Is it the court that forces the CRA to actually do these kinds of things? Or is it the CRA's intention for themselves to do this kind of thing for $1 million? What makes this stuff roll?
Mr. Achadinha: The legislation will set out the rules, and it will try to reflect the policy. Various people will challenge a particular piece of policy or legislation and say, ``We think we should be entitled to an exemption.'' The policy is no, you should not be entitled. The CRA will say, ``Our reading of the legislation is no, it should not be entitled to exemption; this is a taxable service.''
Then you will have the other side, which will take a different view. This will go before the courts, and the courts will ultimately decide.
In a lot of cases, the legislation needs to be amended because you will have a decision from the court that will say, ``The legislation does not necessarily reflect the policy; it is not consistent with an interpretation of the CRA,'' so you amend the legislation to bring it back in line with the intended policy.
The Chair: I think we feel a lot better having gotten that off our souls. Anything further on this area? We will go on to clause 51.
Mr. Mercille: That is on page 40. This clause deals with the GST/HST treatment of the Governor General. Under a special relief in the Excise Tax Act, no GST/HST is payable on purchases for use by the Governor General. Following consultation between the Governor General and the government, it was agreed that the current GST relief for the Governor General should end, and that GST/HST will be payable at the point of sale on purchase for use by the Governor General. The Governor General and his office will be able to recover the GST/HST they paid on purchases for official use under the GST Federal Government Departments Remission Order in the same way as federal departments. This approach will simplify compliance for vendors by eliminating the need to keep special records to justify the non-collection of tax.
The Chair: Was that clause 52?
Mr. Mercille: Clause 51, I believe.
The Chair: I think we mentioned clause 51 earlier.
Mr. Mercille: They are the same.
The Chair: Clause 51, international organizations.
Mr. Mercille: I will explain this change. The Justice Department has drafting standards, and the title there used to read — it is the beginning of a part — ``International Organizations and Officials.'' Basically, there were two clauses in that part. The official in there was the Governor General. We are repealing the clause, so we basically have to amend the title.
The Chair: That is an easy one.
Mr. Mercille: Yes, that was a drafting issue.
This basically concludes the GST/HST part. My colleague Ms. Di Primio will explain the other amendment dealing with the Excise Act, 2001.
Lucia Di Primio, Chief, Excise Policy, Sales Tax Division, Department of Finance Canada: All of the other clauses in Part 2 of the bill before us relate to the Excise Act, 2001, which is the federal taxation statute that deals with the excise duty treatment on alcohol and tobacco products. There are no measures in the bill before us related to alcohol products. I will just mention that up front.
The first measure in clause 53 is identical to the measure explained earlier by Mr. Mercille and yesterday by Mr. Cook with respect to the process that the Canada Revenue Agency must follow when seeking information from a third party with respect to unnamed persons. As previously described, a judicial authorization is required. Previously, it could be obtained on an ex parte basis, meaning the third party did not need to be notified. Now when making that application, the CRA does need to notify the third party in order to seek that judicial authorization. This is being proposed to the Excise Act, 2001 to ensure consistency across the relevant federal taxation statutes.
All of the remaining clauses in Part 2, from clause 54 to clause 61, deal with one measure. These proposed amendments relate to the excise duty treatment of roll-your-own tobacco, chewing tobacco and all the other forms of tobacco that are generally referred to as ``other manufactured tobacco'' in the excise legislation.
Under these clauses, it is proposed that the Excise Act, 2001 be amended to eliminate the preferential excise duty treatment that currently applies to this category of manufactured tobacco. In order to eliminate that preferential treatment, the general rate of excise duty is proposed to increase from its current rate of $11.57 for 200 grams to the new proposed general rate of $21.25 for 200 grams because there was a significant preference on this category of other manufactured tobacco without this measure. In the first full year of implementation, the measure is estimated to generate roughly $75 million of revenue.
The Chair: Is that based on the assumption that cigarette rollers will continue to roll?
Ms. Di Primio: The estimate was produced based on shipment data that is collected annually from producers of this category of other manufactured tobacco. That shipment data declines over time. It is already declining at a rate of approximately 10 per cent, so the revenues that are shown in the budget document, I believe on page 332, show a decline. In the fifth year of implementation the measure is projected to generate about $50 million.
The effect of the change is to make the rate of excise duty on roll-your-own tobacco equivalent, on a per-gram basis, with the rate that currently exists on cigarettes. In essence, it is an equalization of the rates, because there has been a significant preference on roll-your-own tobacco without this measure.
All the relevant changes are found in clauses 56 to 60 of the bill. The rate of excise duty is reflected on a per-50- grams-or-fraction-thereof basis. This is to facilitate the stamping regime administered by the CRA on packages of this product. That is reflected in clause 56(2).
I should highlight for the committee that this rate is reflective of over 99 per cent of the revenues generated. This rate is the general rate that applies to the predominant amount of manufactured tobacco that it affects. All the other rate adjustments found in clauses 56 to 60 are special circumstances. For example, there is a reduced rate that applies to this category of manufactured tobacco available in duty-free shops, but it represents less than 1 per cent of the revenues generated from the excise duty on this category.
There are also a couple of consequential amendments in clauses 54 and 55 of Part 2. Because the potential fines and penalties related to certain provisions under the Excise Act, 2001 are determined directly by reference to the applicable rate on the tobacco product, when the rate is adjusted the potential fine is correspondingly adjusted to reflect the new rate.
Those are all the amendments in the remainder of Part 2.
Senator De Bané: Is the person who buys bulk tobacco and rolls his own cigarettes going to pay the same tax as the person who buys manufactured cigarettes?
Ms. Di Primio: The effective rate per gram would be the same irrespective of whether people purchase fully manufactured cigarettes or a tin of fine-cut tobacco for the purpose of rolling their own.
Senator De Bané: The person who buys a tin usually has fewer financial resources than the person who buys fully manufactured cigarettes, and the person who buys them fully manufactured pays a lot more for cigarettes than the person who buys the tin. You want to make the poorer customer pay almost as much as the richer one. You consider that a sin, and he has to pay more even if the cost of production is less for the tobacco. Do you not think that is going too far?
Ms. Di Primio: This is an interesting point. In analyzing this proposal it would be relevant to highlight for the committee an analysis that was undertaken. A tin of 200 grams of fine-cut tobacco retails for $80 to $90. This does not include the paper tubes for rolling. At a certain time it may have been the case that a tin of 200 grams of fine-cut tobacco was less costly, but based on the research conducted in analyzing the proposal it seems that 200 fully manufactured cigarettes retail at almost the same cost as a tin of 200 grams, which I speculate could lead someone to think that it is more of a niche market. This is relevant information.
Senator Oliver: On two occasions tonight witnesses have talked to us about the use of ex parte — no notice — when making an application in the courts. I used to think that ex parte applications were quite rarely used, but the fact that we have heard it twice tonight makes me think that this extraordinary discretion given to the CRA was unusual. Was there a court case or a series of court cases that said that it is not right to be able to get this information without giving notice because people may want to make representations about this information and it is slowing the process down and, in addition, it is unfair and almost against the rule of law? What prompted that change?
Mr. Mercille: This was basically a practical issue. This change was requested from us by CRA, or by Justice who represents CRA in court. I understand that when CRA wanted to get this court order they were in the practice of sending a notice to the banks, which is the third party in this case, advising them that they would proceed on the matter, but they still proceeded on an ex parte basis. It was when the court order was issued that a bank or other third party would exercise their right to challenge the court order, which would create more delay than if the third party had been notified formally through the legal process in the first place and been given the opportunity to make their representations in front of the judge.
In theory, it may have been designed to accelerate the process for CRA, but it seemed that in practice it did not. References to ex parte will be removed from the Income Tax Act, the Excise Tax Act and the Excise Act, 2001 following these amendments.
Senator Oliver: I think it is a good amendment. It makes the law fairer for all Canadians, particularly those for whom you are getting private and other information. It gives them a chance to respond.
The Chair: As no other senators wish explanations on this section, I wish to thank you.
We will now go on to the next section.
We now welcome Dean Beyea and Patrick Halley from Finance Canada. You know the process; you have been here and watching. Why do we not get right into it and see how far we can get with customs tariffs. We have about three quarters of an hour. Customs tariff division grouping is clauses 62 to 103. Shall we start with clause 62?
Dean Beyea, Director, International Trade Policy, Department of Finance Canada: Sure. As you said, Part 3, Division 1 deals with amendments to the Customs Tariffs Act. There are two main components. The first amends the expiry date for Canada's preferential tariff regimes for developing countries, and the rest eliminate a number of tariffs. Perhaps I can put them in those two groupings.
The first component, clauses 62 and 63, extends the expiry date for Canada's preferential tariff regimes for developing countries from June 30, 2014, to December 31, 2024. That is both for the general preferential tariff and the least-developed country tariff regimes.
The Chair: Is it common to see this periodically? You would come back and extend it and otherwise it sunsets?
Mr. Beyea: The two programs were introduced in 1974 and 1983, and they run for 10-year periods. They are set to expire June 30 next year.
The Chair: Okay.
Mr. Beyea: The second component, covering clauses 64 to 103, eliminates tariffs on a most-favoured-nation or base rate basis on baby clothing and certain sports and athletic equipment. Clauses 66 to 72 cover the baby clothing while clauses 64 and 75 and 73 to 103 cover the sports and athletic equipment tariffs. There are 38 tariffs being eliminated in all. The tariff elimination has been applied to imports as of April 1, 2013.
The Chair: I do not know that I got all those numbers, but we will thumb our way through here and take a look at them.
As you start, we are talking about a third category of preferential treatment, is that correct?
Mr. Beyea: The most-favoured-nation tariff we call the base rate tariff. It is the tariff applied unless there is a preferential rate. It is the tariff that applies to most goods.
The Chair: Is there a schedule of different rates for different products within that category?
Mr. Beyea: Yes. There are 7,400 tariff lines in the Customs Tariff and 17 different rate categories. The most- favoured-nation tariff is the base rate tariff that applies to all countries, and then, for example, we have a U.S. tariff that is it duty free, a Mexico tariff for each free trade agreement, and then two broad tariff agreements for developing countries. That is the general preferential tariff which applies to now 175 developing countries. The budget announced that 72 of those will be moved out of that category. The least-developed-country tariff applies to 49 UN-defined least- developed countries.
The Chair: Is there a percentage reduction across the board here or do we have to look at each tariff item and see the difference?
Mr. Beyea: When it was established originally, the general preferential tariff was roughly two thirds of the MFN rate. It has changed over time given that MFN rates changed, and there is kind of a lag in these other ones, so it is slightly different, but the goal is roughly there. There are a lot of them.
The Chair: The least-developed-country one is one third?
Mr. Beyea: The least-developed-country one is duty free across the board for all goods, other than over-quota supply managed goods.
The Chair: Okay.
Senator Oliver: You are in Finance, and a lot of the things that you were just talking about are trade, and trade is Foreign Affairs and International Trade, but you still work in finance. Are you dealing with people in trade who are doing these negotiations? For example, when a country like China or Korea was getting special breaks under this, did they have to make tariff concessions or something to Canada? Were you part of that? If so, what were the types of concessions they made?
Mr. Beyea: The general preferential tariffs in the least-developed country, for example, are unilateral tariff programs that Canada offers to developing countries with the goal of enhancing exports and economic growth in those countries. The decision to remove the countries just reflects what has happened in the global economy over time. Countries like China and Korea are no longer in need of preferential tariffs to compete.
Senator Oliver: Were there any concessions?
Mr. Beyea: No, these are unilateral.
The Minister of Finance is responsible for the Customs Tariff; it is a fiscal statute. However, we work closely with the Department of International Trade. Mr. Halley co-leads the market access negotiations in all the large trade agreements, along with Foreign Affairs.
Senator Callbeck: How much, roughly, will the tariff reductions amount to on the baby clothing and the sporting equipment?
Mr. Beyea: It is $79 million annually.
Senator Callbeck: What about the tariffs that will be increased? What are we talking about there, roughly?
Mr. Beyea: No tariffs will be increased, but the effect of graduating the high-income and upper-middle-income countries will add $333 million annually.
Senator Chaput: How will you monitor that? I am trying to imagine that.
Mr. Beyea: The Canada Border Services Agency administers the Customs Tariff law. For these changes, for example, the tariff rates were eliminated in their system as of the date they came into force, April 1. These changes for the general preferential tariff, the graduating countries, will come into effect January 1, 2015. The rates will change as of that date. It is a very advanced electronic system.
[Translation]
Senator Bellemare: Continuing a bit with figures, I imagine the $333 million includes GST on the tariff? Is that the total? For consumers, that means a price increase for a category change and the GST will also perform better for the governments.
[English]
Mr. Beyea: No, that is the waiver being granted on a tariff basis only, the $333 million.
[Translation]
Senator Bellemare: So, there will also be an impact on tax revenues on the GST.
Patrick Halley, Chief, Tariffs and Market Access, Department of Finance Canada: One thing that is important, with respect to preferential tariffs, is that the objective here is to create an incentive so that importers can import from other sources that are often subject to lower tariffs or are free of customs duties. Within a certain number of years, there will be a change in the flow of imports.
Senator Bellemare: We have worked a lot on tariffs in this committee. It is normal to try to level the playing field a little. Countries like China, for example, no longer need a little help. On the contrary, it makes things fairer.
[English]
Senator McInnis: I think this is good stuff. China and South Korea have certainly made their mark.
I am asking you this question for a selfish reason. If I wanted to make the Port of Sheet Harbour tariff-free, would you have to amend the act?
Mr. Beyea: The tariffs apply on a national basis.
Senator McInnis: I know, but, for example, we had a company that wanted to bring in furniture parts, manufacture it in Sheet Harbour and ship it out.
Mr. Halley: With respect to manufacturing imports, in Budget 2009 the government took measures to remove those duties on manufacturing imports and machinery and equipment to assist businesses. As Mr. Beyea explained, this is applied on a national level, so it would apply irrespective of where you are located in Canada.
Senator McInnis: I used a bad example, but my point is can you have a tariff-free zone?
Mr. Beyea: The budget did announce that Canada will invest and enhance foreign trade zone policies in Canada.
There are a number of duty waiver programs that form part of this and they will be put together. There will be more to come on that later. There are the Duty Deferral Program and Duties Relief Program to do exactly the kind of thing you are looking at, to bring it into a zone. It brings in tax programs as well, which allows this kind of minor processing to be done without paying the tariffs or with paying them later when they are released into the economy.
Senator McInnis: That would not deal with CRA.
Mr. Beyea: With CBSA, certainly on the tariff side.
Senator Callbeck: It says here the government will closely monitor the impact of these tariff reductions on Canadian retail prices. How will you do that?
Mr. Beyea: Well, we have worked hard lately with both the Retail Council of Canada and a number of firms. We will select someone to monitor this. We have worked with them closely. We have worked with Statistics Canada and set out a system of parameters that we will look at. We will check prices on a national level. We are quite comfortable that over the next year we will have a system in place that will do that. We have also talked to consumer groups. We will inform them of this process and continue to work with the Retail Council, but this will be done independently.
Senator Callbeck: Prices do not change?
Mr. Beyea: We will report to the government. I think the government has been clear that they expect the prices to be passed along. We will soon set up a system that will monitor this quite closely and report back.
The Chair: Do you want to point out anything further in relation to these various clauses? We can see a lot of different athletic equipment items listed here through the various clauses. You will know that one of the items in this committee's report that we pointed out was that there used to be an industry that was protected by tariffs. Since that industry is no longer in Canada, why do we still have these tariffs other than as a revenue generator for the government? We felt that should not be hidden away as a revenue generator. We were very pleased to see that certain items have been reduced as a result, hopefully at least in part from our report's pointing these things out.
We also asked that there be a complete review of the tariff system to determine why we have tariff categories on certain items when we are not protecting Canadian industry. Is that under way? Is that happening?
Mr. Beyea: Absolutely. We look at the tariff structure and policy on an ongoing basis, certainly in the context of the report. You are absolutely right; we look closely at that. I think skates were a glowing example of where there was a 0 per cent tariff in the United States and an 18 per cent tariff in Canada. Largely they were not made in Canada, except for a few high-end skates. Also, sports and athletic equipment was an area where the profit margin margins were relatively low, showing it was a competitive sector, and where we expected the prices could be passed on. In other sectors, there were higher profit margins with more room to absorb that. It certainly was an area where we thought we would see the effect on retail prices.
The Chair: When you are doing your monitoring, we were told by the Retail Council of Canada that each intermediary has a margin and a markup based on the overall cost, which includes the tariff. Therefore, their markup will go down or the percentages have to go up if they still want to net out the same amount. We were told that, and it was also put in our report.
[Translation]
Senator Bellemare: In the consumer price index, when the inflation rate is calculated, normally the price paid by the consumer is included. Will that have an impact on the consumer price indices since the change is minor?
Mr. Halley: It is quite a narrow measure. It applies to 38 items out of 7,400. However, the government is expecting the savings from lower or eliminated customs duties to be passed on to the consumer. So, we are expecting lower prices, equivalent to the customs duties the government is eliminating. In general, however, there may not necessarily be an overall impact, but we expect the impact to be measurable for these specific products.
As Mr. Beyea mentioned, we are working with the council and other enterprises to create a monitoring agency so that the prices would decrease in an equivalent manner.
Senator Bellemare: There will be an increase in the tariff, right? So, the consumer price will increase. Prices will not drop?
Mr. Halley: There are two separate measures. With respect to measures relating to the general preferential tariff, a tariff incentive is given to importers so they can import from a source, in this case countries that may need it more than others. However, this general preferential tariff measure announced in the budget applies to only two per cent of imports.
Senator Bellemare: Yes, but this is $333 million in additional revenue for the government. That means that someone will have to pay. I wanted to know whether there was an impact on the prices that were forecast, but you are saying there might be.
Mr. Halley: I was talking about the measure on consumer goods, baby items, and so on.
Senator Bellemare: I was talking about the others.
[English]
Mr. Beyea: It is a good question and it is important to know. We did go out and consult on this, that we would graduate these countries. One feedback that we heard was that it would be best if you could delay this. We had planned to do it 18 months from the date of consultation, and it was delayed another six months, so a full two years. When Europe went through this process they did only 18 months, and that was at the request of certain retailers who thought they might be able to ship their source of supply to countries that will continue to benefit.
We took the wealthiest countries, graduated them from this and shifted it down, so this kind of development assistance is going to the right place. The countries below a certain income threshold still have the option. At the same time, goods from the United States and other free trade partners could also be source duty-free.
The Chair: Which clause? I have just gone through them up to 103 and I am missing the one where you talk about graduating certain nations from general preferential tariff up to most favoured nation. Where do we find that?
Mr. Beyea: It is not part of the bill.
Senator Oliver: No wonder you could not find it.
Mr. Beyea: The only amendment to the GPT and LDC that have a legislative change are the extension of the dates. All the other changes will be made through order-in-council and regulatory amendments using existing authorities under the Customs Tariff.
The Chair: Thank you for that. The other point I wanted to have you clarify was this: In our study on price differences between the United States and Canada and the price gap, there was a lot of discussion about the different tariff rates for offshore automobiles manufactured away from North America, coming into the United States or coming into Canada, and parts therefor. My recollection is 6 per cent in Canada and 3 per cent in the U.S. I may be wrong on that, but is there anything developing in that regard?
Mr. Beyea: You are not far off. The tariff is 6.1 per cent in Canada. It is 2.5 per cent in the U.S. on automobiles and 25 per cent in the U.S. on light trucks.
The Chair: Is anything happening in that regard? We felt there should be some harmonization, if not elimination.
Mr. Beyea: In that regard, it is difficult. Our tariffs are bound against increase, for example. If we wanted to go the way of the pickup truck, we would have to renegotiate it with all our trading partners at the WTO, for example.
To come down unilaterally, there is manufacturing here; it is a tariff that the automobile manufacturers see value in having. It is also a key part of many of our trade negotiations — Korea, Japan, Europe, TPP in that regard.
The Chair: I do not mean to get you into a policy discussion here. I wondered if there was any activity, but I hear what you are saying.
Senator Callbeck: On the countries like China, the Retail Council of Canada said that the change in the tariff will add about 3 per cent to the cost of the products. Has the department done any analysis on this? Does that figure seem in the ballpark?
Mr. Beyea: Like we said, there continues to be a duty-free source of supply and plenty of time to change sources of supply.
If you look at this in context, what we are doing is affecting about $10 billion of imports of some $469 billion in annual imports, roughly 2 per cent. It is a very small percentage of trade.
Even from these countries, it is a small percentage. I think we will see a tariff increase of about 3 per cent on about 6 per cent of trade from these 72 countries. It is still a very small amount.
There are a number of goods that we import from countries like China, such as apparel, that are not covered by the general preferential tariff. We have to be cognizant of that. I would think that number is high.
The Chair: Thank you. That was very helpful, Mr. Beyea and Mr. Halley. Thank you for being here.
We have come now to clause 104. We will be talking about Part 3, Division 2, which is clauses 104 to 109. We have Shannon Grainger and Jane Pearse here to deal with these.
You know the process we like to follow. You can group clauses together if they conveniently all talk about the same issue, but then go on to the next one.
Jane Pearse, Director, Financial Institutions, Department of Finance Canada: Thank you very much.
Clauses 104 to 109 we will talk about at the same time. Basically, they touch four different acts — the Trust and Loan Companies Act, the Bank Act, the Insurance Companies Act and the Cooperative Credit Associations Act. The intent is the same and the change is replicated across those four acts.
The intent of Part 3, Division 2 of the bill is to remove the requirement that committees of boards of directors of federally regulated financial institutions be comprised of a majority of Canadian residents. Currently, the financial institution statutes require that a majority of the board be resident Canadian and the committee as well. This amendment is to remove the requirement just for the committee. The board continues to be under an obligation to be a majority of Canadian residents.
This is to respond to the growth of Canadian financial institutions and their activities abroad and a recognition that the Canadian financial institutions may wish to source high-quality board members from around the world and that the financial institution is the best place to determine how best to use the expertise, qualities and skills of those board members in determining the allocations of board members across their committees.
Senator Oliver: I do not quite understand. You would have a board of 12 directors. Are you suggesting that if there are four committees you could have people sitting on the committees who are not on the board?
Ms. Pearse: No. We are saying those four committees could be made up of different sets across those 12 board members, but if there were seven Canadians on that board and five non-Canadians, there could be a board committee that is made up of fewer than three Canadians and three non-Canadian residents.
Senator Oliver: You cannot be on a committee unless you are on the board.
Ms. Pearse: Yes. The board continues to be responsible for all decisions made by the committee and the board.
Senator Oliver: I am sorry, but I did not understand.
Senator Black: Following up on that question, I think it is obvious, but I want to understand. Still 50 per cent of board members must be resident Canadians?
Ms. Pearse: Yes.
Senator Black: Has that changed from being resident Canadians as opposed to Canadian citizens? Is there any kind of change around that?
Ms. Pearse: There is no change at all to the board requirement. All we are doing is going in fairly surgically into the four acts and removing a requirement that had been there that established a requirement at the committee level. That is right.
The Chair: Is the term ``committee'' defined? We do not have the full acts here, but clause 104 talks about committees of a company. It does not say committees of the board of a company. Should I get concerned about that?
Ms. Pearse: No, I think you can rest easy on that one. The sections in the Bank Act and the other financial institutions acts have been around for many, many years. There are fairly large sections of those acts that address corporate governance issues, the structure of the firm or the financial institution and the running of that financial institution.
Is there a direct definition of ``committee'' in the act?
Shannon Grainger, Senior Project Leader, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance Canada: No, there is no direct definition of ``committee.'' The financial institution statutes legislatively mandate two specific types of committee — an audit committee and a conduct review committee — and then the legislation specifies the minimum level of requirements and duties of those two committees. However, financial institutions generally establish a wide variety of committees, and in fact there is an expectation on the part of the Office of the Superintendent of Financial Institutions that certain committees will be established for risk management purposes and that sort of thing. However, the committee of the board is not defined.
The Chair: All these committees, then, are committees of the board of the company or of the bank, even though you refer to them just as committees of the company and of the bank?
Ms. Grainger: Yes.
The Chair: They are committees of the board.
Ms. Grainger: They are committees of boards of directors, yes.
Senator Black: Do you happen to know what the practice would be in the U.S., Australia or the U.K. respecting board membership on financial institutions, credit unions, insurance companies, et cetera?
Ms. Pearse: Yes, luckily. There is quite a wide spectrum of international experience. Most countries require a certain level of residency at the board level, and very few countries actually refer to any committee requirement in terms of a residency. In terms of specifics, the country that is probably the most stringent is the United States. If you look at it purely on a legislative basis, they actually have a requirement that all directors be U.S. citizens and that two thirds of them be resident in the United States.
They also have a provision that allows the office of the controller of the currency to provide some leniency around that. I think in practice you will see that most U.S. financial institutions do have non-U.S. citizens on their board, but if you look at the legislation itself, it is a very high requirement. The U.K., on the other hand, has no residency requirement.
In terms of other legislation in Canada, the CBCA, which is often what financial institution statutes mirror in terms of the non-financial institutions, has a requirement that 25 per cent of board members be resident Canadians, and they have no requirement at the committee level.
Senator Black: In terms of other industries in which the federal government would be engaged, such as perhaps telecommunications, are there any requirements on residency around board and committees for industries other than financial?
Ms. Pearse: I think you have my speaking notes in front of you. It is interesting, because the Telecommunications Act requires that not less than 80 per cent of the members of the board of directors be resident Canadians, but there are no requirements at the committee level.
Senator Gerstein: I am not a lawyer, and I would like just a clarification. You have used three terms, ''Canadian,'' ``resident'' and ``citizen.'' You referred to the fact that in the United States, one must be a United States citizen. Is a Canadian resident by definition a Canadian citizen?
Ms. Pearse: No.
Senator Gerstein: When I read here about the requirement that the majority of board members be Canadian residents, the entire board could be residents of Canada and not be citizens?
Ms. Pearse: That is right.
Ms. Grainger: I just want to be really specific. The Financial Institutions Act defines what is a resident Canadian, which is a bit peculiar, because we think about it as Canadian residence. That is the common way that people think of it.
According to the act, a resident Canadian is a natural person, so an individual, a Canadian citizen ordinarily resident in Canada — so you meet the definition if you are a citizen — or a Canadian citizen not ordinarily resident in Canada, so you can be a citizen living elsewhere.
The Chair: And you are still a resident.
Ms. Grainger: Yes, or a permanent resident within the meaning of the Immigration and Refugee Protection Act and ordinarily resident in Canada.
There is some more specificity. This would capture Canadian citizens; it would capture what we would consider as permanent residents under the Immigration and Refugee Protection Act; and it would capture Canadian citizens living outside of Canada but who have that citizenship tie.
Senator Gerstein: It is the middle one I am interested in: a permanent resident who may not be a citizen. Is that correct?
Ms. Grainger: No. The second is a Canadian citizen who is not ordinarily resident in Canada. A Canadian citizen resident in the United States or the United Kingdom fits under this category.
The Chair: He or she is still a resident Canadian.
Ms. Grainger: The last category is a permanent resident, within the meaning of the Immigration and Refugee Protection Act, ordinarily resident in Canada, so has to be physically in Canada.
Senator Gerstein: Just to clarify: Could you have a board of Canadian residents, none of whom were citizens?
Ms. Grainger: No, you could not. You could have a board of permanent residents. Yes. I am sorry; you could.
Senator Gerstein: That is my point. Interesting.
The Chair: It took you a while to get there, but you are there.
Ms. Pearse: I think the other important thing to consider is the interest of the financial institution in having the best board possible and being able to accomplish the obligations and requirements that are imposed on it by the Office of the Superintendent of Financial Institutions. Obviously, the financial institution would have its best interests at heart when they go out and look for board members. I am not sure. We could investigate further whether that has ever occurred or would likely occur.
[Translation]
Senator Bellemare: Of all the members on the board of directors, the people who are not Canadian residents are what? Visitors? Permanent residents? People who come just to be on the board of directors, but who are residents of the United States or France who simply come by invitation?
[English]
Ms. Pearse: Yes. For example, if a financial institution has a significant part of its business in a particular country overseas, whether it is investment in the United States or China, they may well wish to have some representation on their board of directors to understand the market and look at issues that may be impacting the company coming from that part of their business.
The Chair: Those are all the questions we have. We would like to thank you very much for bringing this amendment to us. We are assuming that this was a request of the financial institutions that resulted in this amendment being brought forward.
Ms. Pearse: I can tell you that they were pleased to see the amendment.
The Chair: That is all we need to know. Thank you.
Mr. Vats and Mr. McGirr, thank you very much for your patience. We will try to deal with clauses 110 through to 125, dealing with the Federal-Provincial Fiscal Arrangements Act. Could you begin with clause 110 and tell us what we are trying to achieve here?
Tom McGirr, Chief, Equalization and TFF Policy, Department of Finance Canada: I will try to be quick given the timing.
The Chair: We want to understand what is here.
Mr. McGirr: As you pointed out, what we are about to look at are the amendments being made to the Federal- Provincial Fiscal Arrangements Act. The goal of the these amendments is to implement the government's commitment to renewing the equalization and territorial formula financing programs and to set out the total transfer protection payments to New Brunswick and Manitoba, for 2013-14, that were announced at the December 2012 finance ministers' meeting. It also clarifies the calculation of the growth rate of the Canada Health Transfer beginning after March 31, 2017.
The legislation is also making several housekeeping changes to better reflect current circumstances. As part of the renewal, clause 110 extends the minister's authority to make equalization payments to March 31, 2019. It also repeals payment amounts set out for previous years that are no longer necessary for the administration of the program.
Clause 111 sets total transfer protection payments to New Brunswick of $49 million and to Manitoba of $7 million.
The Chair: How does clause 111 compare to current years or some previous years? Just a number sitting by itself does not —
Nipun Vats, Director, Federal-Provincial Relations Division, Department of Finance Canada: The total of transfer protection payments for 2013-14 is $56 million. Just for example, total transfer protection has been around since 2010- 11 and has been provided each year. It ensures that the total sum of the major transfer amounts to provinces does not decline year over year.
It is provided by province, so, last year, the total was $680 million. It has declined considerably from 2012-13 to 2013-14.
The Chair: That is the total amount.
Mr. Vats: That is right.
The Chair: Manitoba is $6.9 million?
Mr. Vats: It is $7 million this year. Last year it was $201 million. Basically, that reflects the growth in equalization. You are adding the Canada Health Transfer, the Canada Social Transfer and equalization payments and comparing the amount of that, in the previous year, to the amount in the current year. The health transfer and social transfer are on fixed growth paths, whereas equalization entitlements by province depend on their relative fiscal capacities. As a province's total transfer payments decline, that largely reflects greater growth in their equalization amounts.
Senator Black: I do not understand a lot of this. Would you mind repeating your last statement?
Mr. Vats: Sure.
Senator Black: I thought I had the drift.
The Chair: When the number goes down, that means you are getting more, right?
Mr. Vats: Let me see how I can explain this. In order to determine the total transfer payment amount, you take the sum of the Canada Health Transfer, the Canada Social Transfer, equalization and the prior year's protection amount. If they received a total transfer payment that prior year, you add that in as well, and then you compare that to what they would receive in equalization, Canada Health Transfer and Canada Social Transfer in the current year. If that sum of those transfers and protection in the prior year is greater than what they are receiving in the current year, then, to make up that difference, you provide a total transfer protection payment.
Senator Black: It is a guarantee that, whatever the peak is, you never can go below the peak.
Mr. Vats: That is right, including the protection in the prior year.
Senator McInnis: That is with Manitoba and New Brunswick.
Mr. Vats: That is correct.
Senator Black: That is a special arrangement with Manitoba and New Brunswick?
Mr. Vats: It has turned out that this year only those two provinces needed additional funds.
Senator Black: Because they left the peak.
Mr. Vats: That is right.
The Chair: I think we are getting it; it was worth that discussion.
Senator Black: Thank you very much. That was helpful.
Mr. McGirr: Clause 112 amends section 3.2(1) of the act to remove amounts set out for a previous fiscal year and to generalize its applicability by removing the reference to March 31, 2008.
The Chair: What does that mean?
Mr. McGirr: The applicability? The way that section 3.2(1) reads right now is, ``. . .for a fiscal year beginning after March 31, 2008''; the fiscal equalization payment would be — We are just saying that, now that we are passed that year, we can just say, ``The fiscal equalization payment is going to be.'' We do not need to reference that year anymore.
The Chair: Okay. Go ahead.
Mr. McGirr: Clause 113 repeals the transitional payment to British Columbia as it is no longer applicable. I will skip clause 114 and lump it together with a bunch of stuff after this.
The Chair: Can you tell us what transitional payment is?
Mr. McGirr: When we brought in the new equalization formula back in 2007, there was an issue in the previous formula. There used to be an outlier provision for British Columbia with respect to the calculation of fiscal capacity in property taxes. With the move to the new formula, we took out the outlier, but we said that for the first three years the outlier would continue to be calculated for British Columbia and that British Columbia would receive a payment if that, in turn, led to a benefit. However, British Columbia was not a receiving province in any of those years, so the payment was never made.
Senator Black: When you say a receiving province, you mean a province that benefits from equalization.
Mr. McGirr: Correct.
Senator Black: Currently, British Columbia does not fall into that category.
Mr. McGirr: Correct.
Senator Black: Which provinces do not fit into that category?
Mr. McGirr: The current non-receiving provinces are British Columbia, Alberta, Saskatchewan and Newfoundland and Labrador.
Senator Black: Thank you very much.
Mr. McGirr: As I said, I will skip clause 114, but I will return to it momentarily. Clause 115 modifies two of the definitions in section 3.5 that are used in the formula set out in sections 3.2 and 3.4 of the act to reflect the fact that Newfoundland and Labrador no longer receives payments under the Canada-Newfoundland Atlantic Accord Implementation Act and the repeal of the B.C. transitional payment.
Clause 116 repeals sections 3.6 and 3.7 as they are no longer required for the administration of the program. The applicability of section 3.71 of the act is being limited to Nova Scotia as Newfoundland and Labrador is no longer eligible for the cumulative ``best of'' guarantee.
Clause 117 modifies section 3.72 of the act, reflecting the fact that only Nova Scotia is eligible for the cumulative ``best of'' guarantee and the repeal of section 3.6. Here is where I will lump clause 114 in with clauses 118, 119 and 120. All four of those clauses simply make consequential amendments to the repeals of section 3.3, 3.6 and 3.7.
Clause 121 modifies the time when the final computation of the equalization payment is deemed to have occurred to better mesh with the administration of additional fiscal equalization offset payments to Nova Scotia. The reference to the Canada-Newfoundland Atlantic Accord Implementation Act is being removed as it is no longer applicable.
Clause 122 makes several changes that are required to implement the renewal of territorial formula financing, TFF, as announced at the December 2012 finance ministers' meeting. Specifically, the revenue block part of eligible territorial revenues is being converted to representative tax system measures analogous to what is used in equalization, necessitating the repeal of references to the revenue block and the introduction of new revenue sources, along with the modifications to existing revenue sources.
The clause also sets out the value of each territory's gross expenditure base for 2013-14, as calculated under the formula last December. Finally, clause 122 makes a couple of housekeeping changes by repealing amounts already paid out for a previous fiscal year and by making it clear that the data being used in the gross expenditure base escalator is already lagged, by two years, in the regulations and does not need to be further lagged in the act.
The Chair: Am I to interpret your comments with respect to clauses 122 and 123 to mean that the territories will be on a basis for calculation of entitlement to equalization — a similar basis in terms of revenue sources, et cetera — as the other provinces?
Mr. McGirr: Only in the measure of fiscal capacity. In TFF we are now trying to measure the ability of territories to raise revenues if they apply standard taxing practice across the country at average tax rates.
The Chair: You are moving one step closer to a similar type arrangement.
Mr. McGirr: Yes. As part of the program's renewal, clause 123 extends the authority to make TFF payments to March 31, 2019. It also sets out the calculation of each territory's gross expenditure base in 2014-15, which includes an adjustment to ensure that TFF payments in that year are not affected by the conversion of the revenue block into representative tax system measures.
Clause 124 repeals the reference to a previous fiscal year in section 4.2 of the act.
Finally, clause 125 clarifies that the escalator that will be used to determine the growth in the Canada Health Transfer after March 31, 2017, will be determined in the same fashion as the one used in the equalization program. Specifically it will be determined once, no later than three months before the beginning of the fiscal year, using the same estimate of nominal gross domestic product that is used for equalization.
The Chair: At the present time is it 6 per cent?
Mr. McGirr: Yes.
The Chair: Then it will go to this new formula.
Mr. Vats: That is right.
The Chair: Does the social transfer remain at 3 per cent?
Mr. Vats: That is correct.
Senator Callbeck: This new program for the Canada Health Act is going up 6 per cent. Let us say it was in effect now. How much would the payment go up this year, roughly?
Mr. Vats: I do not have the figure here. You would have to take the three-year moving average GDP growth.
Senator Bellemare: Plus inflation, that is about 3.5 per cent or 4 per cent.
Mr. Vats: It is slightly more than 4 per cent.
The Chair: Could you pose your question so we could all hear it?
Senator Bellemare: It was not a question, it was just a calculation.
[Translation]
We currently expect the real growth of the economy to be 1.5 or 1.8. Add inflation to that — about 2 — and it would be between 3.5 and 4 per cent.
[English]
Mr. Vats: In equalization it is a three-year moving average, so you have to factor in the growth in the prior years.
The Chair: When you say in regarding clause 125 ``consistent with equalization,'' is that the movement toward per capita?
Mr. Vats: No, this just refers to the growth of the overall envelope for the program. Right now the overall pot of funds in equalization grows with respect to a three-year moving average of gross domestic product, and it is calculated in December prior to the year in question. This is basically saying that for consistency, given that the CHT will be growing at GDP as well, starting in 2018-19 that will be calculated in the same way as it is currently calculated in equalization. It is a consistent GDP growth measure for the two programs.
[Translation]
Senator Bellemare: Having an average over three years prevents fluctuations in the related transfer payments. If, for example, one year, the inflation rate, or we are in a recession, the nominal GDP increases very little, but the transfer payments will still increase because previous means will be used.
The Chair: Yes.
Senator Bellemare: So, that allows for more linear, more gradual growth.
The Chair: It is easier for the provinces, for planning.
Senator Bellemare: Exactly.
Senator Chaput: Mr. Chair, would it be possible to get an information table, if one exists, showing the various transfers with the totals, the provinces and territories, and perhaps a comparison of the figures from the previous year? Is it possible to get that kind of information? I think it would be very helpful to us in understanding this.
Senator Black: That is a good idea.
The Chair: Is it possible to get that?
[English]
Mr. Vats: It should be possible to do that.
The Chair: That would be excellent. If you send that to our clerk, she will ensure that everyone gets a copy.
Are there any other questions, honourable senators, with respect to equalization?
I think that is it.
Mr. McGirr: I can add one more thing to the question about what the growth rate would have been. I was comparing the total amount of equalization that will be paid out in 2013-14 to the amount paid out in 2012-13, and that shows a growth rate of a little over 4.4 per cent.
The Chair: Mr. Vats and Mr. McGirr, thank you very much. Equalization, the Canada Social Transfer and the Canada Health Transfer are very complicated areas. You have helped us understand the proposed changes and we thank you for that. Thank you for waiting around for your turn.
This meeting is now concluded.
(The committee adjourned.)