THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
OTTAWA, Tuesday, December 5, 2017
The Standing Senate Committee on National Finance, to which was referred Bill C-63, A second Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017, and other measures, met this day at 5 p.m. to give consideration to the bill.
Senator Percy Mockler (Chair) in the chair.
The Chair: Honourable senators, I welcome you to this meeting of the Standing Senate Committee on National Finance. My name is Percy Mockler, a senator from New Brunswick and chair of the committee. I wish to welcome all those who are with us in the room and viewers across the country who may be watching on television or online.
I would now like to ask the senators to please introduce themselves, starting on my left.
Senator Forest: Senator Éric Forest from the Gulf Region of Quebec.
Senator Marwah: Sarabjit Marwah, Ontario.
Senator Pratte: Senator André Pratte from Quebec.
Senator Bellemare: Senator Diane Bellemare from Quebec.
Senator Andreychuk: Raynell Andreychuk, Saskatchewan.
Senator Eaton: Nicky Eaton, Ontario.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
The Chair: Thank you.
Honourable senators, the Honourable Minister of Finance and witnesses, today we begin our consideration of Bill C-63, which was referred to us by the Senate this afternoon, A second Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017, and other measures.
It is true that this type of legislation is at the heart of the mandate of the Standing Senate Committee on National Finance.
Today, to discuss Bill C-63, the budget implementation act, 2017, no. 2, we welcome and have the honour to have at the table the Honourable Bill Morneau, Minister of Finance of Canada.
I would like to take this opportunity to say thank you, Mr. Minister and your officials, for being here to share with us your views, comments and clarity on such questions that will be asked by the senators.
Also permit me to introduce Paul Samson, Associate Assistant Deputy Minister, International Trade and Finance Branch; Rob Stewart, Associate Deputy Minister; and Andrew Marsland, Senior Assistant Deputy Minister, Tax Policy Branch.
Again I take this opportunity to thank you, Mr. Minister, for your availability to the Standing Senate Committee on National Finance. I have been informed that you have a statement. We will ask you to make your statement, which will be followed by questions from the senators. The chair has also been made aware that you are sharing with us one hour, which is appropriate.
Mr. Minister, the floor is yours.
Hon. Bill Morneau, P.C., M.P., Minister of Finance: Thank you, Mr. Chair. It’s a pleasure to be here.
Senators, I want to say it gives me great pleasure to speak with you today about the budget implementation act, no. 2, Bill C-63. Obviously I am happy to answer your questions today and ensure this legislation benefits from your perspective.
The bill, as you know, is another step in our plan to strengthen and grow the middle class through smart investments that will create jobs, grow our economy and provide more opportunities for every Canadian.
This bill demonstrates the commitment we made to Canadians — we came to power a little over two years ago — to strengthen the middle class and ensure its growth.
I’m confident the actions we have taken to date do just that.
As you know, we asked when we came into office the wealthiest 1 per cent to pay a little more so we could cut taxes for the middle class. We increased the Guaranteed Income Supplement for low-income seniors. To provide more money for Canadians when they retire, we expanded the Canada Pension Plan. The strengthened Canada Pension Plan will ensure that Canadians are better prepared financially for retirement so that they can worry less about their savings and focus more on spending time with their families.
We introduced a new tax-free Canada Child Benefit, which has played an important role in Canada’s recent economic performance by putting more dollars back in the hands of those parents who need it most raising their children.
Given that economic growth has exceeded our expectations, we indicated in the fall economic announcement our intention to take additional measures to strengthen the Canada child benefit.
To ensure the Canada Child Benefit keeps pace with the rising cost of living, we intend to make annual cost of living increases to the CCB starting in July 2018, fulfilling a commitment that we made by doing it two years ahead of schedule.
I want to put this in real terms. For a single parent of two making $35,000 a year, a strengthened Canada Child Benefit will mean $560 more next year, tax free, for books, skating lessons, or for whatever their family might need. In addition, we are also proposing to enhance the Working Income Tax Benefit starting in 2019 to make it easier for low-income Canadians to support themselves and their families.
In October, we also announce that we intend to lower the small business tax rate to 10 per cent effective January 1, 2018, and to 9 per cent effective January 1, 2019. We are going to make sure that this small business rate is effective in encouraging businesses to grow, to buy new equipment and to hire more workers.
The economy, as you know, is growing, so we are doubling down on a plan that we can see is working. With an average growth of 3.2 per cent since mid-2016, the Canadian economy is the fastest growing economy among G7 countries. In just two years Canadians have created 600,000 jobs. Just last month the economy added eight times more jobs than expected. Over 80,000 jobs were gained in the month of November. This is the biggest addition of jobs in a single month since April 2012 when the economy was just coming out of recession.
The jobless rate is now at 5.9 per cent. It’s the lowest rate since February 2008. The youth unemployment rate is near the lowest that has been recorded.
This growth is responsible for a significant upward revision of Canada’s fiscal outlook. Planned amounts have improved by more than $6.5 billion compared to our projections last March.
The federal debt-to-GDP ratio has been placed firmly on a downward track, and Canada continues to have the best fiscal position among G7 countries.
We understand that despite these positive signs people are still anxious about their future and the future of their families. We know that there is still more work to be done. Canadians want to be assured that their hard work will mean a better future for their children and for their grandchildren. That job, we know, falls to us. It’s our responsibility to show through concrete actions that their concerns are real and that we’re ready to take the required steps to help them to succeed.
That’s why we’re here today to consider and discuss the important measures in Bill C-63 and to reach consensus, we hope, as Canadians expect us to, on the things that matter most. I would like to highlight a few measures found in Bill C-63 that I know are top of mind for this committee.
In Budget 2017 the government made a commitment to eliminate unpaid internships in federally regulated sectors where the internships are not part of a formal educational program. Making a successful transition into the workforce can be a challenge without the hands-on, workplace-based learning experience; but it’s also true that some internships, especially those that are unpaid, can be exploitative and unfair. We want to end stories that we hear from young people that are being used as free labour. Young people and others who are desperate to find a way into the labour market can find themselves in situations that cause undue hardship. We have put down in this budget that we don’t believe that’s acceptable.
The Government of Canada intends to ensure that interns are treated fairly. To that end, Bill C-63 proposes changes that would amend the Canada Labour Code to prohibit unpaid internships unless they are undertaken to fulfil the requirements of a program offered by a secondary or post-secondary educational institution or vocational school or an equivalent institution outside of Canada. Our overarching goal is to provide young Canadians with fair and meaningful employment opportunities through programs designed to help them to gain the skills and experience they need to find good jobs.
Bill C-63 would also protect the rights of federally regulated workers to request flexible work arrangements from their employer.
Flexible work arrangements include flexible start and finish times, the ability to work from home and new unpaid leave to help employees manage their family responsibilities. These work arrangements benefit many women who continue to do the majority of unpaid work in the home.
As you may recall, Budget 2017 contained a gender statement which was a first for Canada. It’s an important step that we will build upon in future budgets to better understand how measures affect men and women in different ways. The government believes that having a meaningful and transparent discussion around gender and other intersecting identities will help us to make informed decisions to advance the goals of gender equality, fairness and stronger workforce participation. The amendments found in Bill C-63 will help us to achieve that and put us in a better position to do even more in the context of Budget 2018.
Among other changes in Budget 2017 we move to add nurse practitioners as eligible medical practitioners who can certify the paperwork necessary for individuals to access the Disability Tax Credit. For many Canadians, nurse practitioners are the first and most frequent point of contact with the health care system, but these professionals weren’t allowed to certify application forms for individuals with impairments who are applying for various tax credits. We intended to fix this.
Budget Implementation Act, No. 1, moved to add nurse practitioners to the list of medical practitioners that can certify the impacts of impairments for Disability Tax Credit applicants. BIA2 will create greater policy consistency, adding nurse practitioners to the list of medical practitioners who are permitted to perform similar certifying functions such as for the Disability Tax Credit, the child care expense deduction, the definition of a qualifying student for purposes such as calculating the scholarship exemption, registered disability savings plans and registered pension plan regulations. This is an important step to improve access to the credit in areas where nurse practitioners may be the primary care provider.
Bill C-63 also includes measures that will enhance crucial trade links, support economic growth and offer Canadian firms new commercial opportunities. In Budget 2017 we propose to invest $256 million over five years for Canada to join the Asian Infrastructure Investment Bank. The legislation we’re discussing today will give the government the authority to take up membership in this institution. The investments we intend to make will build our multilateral engagement with countries around the world.
Canada’s vision for the Asian Infrastructure Investment Bank will promote inclusive and sustainable economic growth in Asia and beyond, by encouraging investment in high quality infrastructure projects, particularly in the transportation and energy sectors.
Canada is the first North American country to apply for membership of the AIIB, demonstrating our strong engagement in multilateral institutions, and will commit to playing a unique and constructive role in supporting the bank’s operations in governance.
To conclude, Bill C-63 has concrete measures that move Canada forward, strengthen our middle class and grow our economy. As we look forward to Budget 2018, we will continue our work to build on the gains we made over the last two years. We want to make sure that we create the conditions for all Canadians to succeed in a changing economy, and we’ll help families feel better about the future of their children and their grandchildren.
I urge the members of this committee to support this and to work with us on those elements of this legislation that could benefit from your views and ideas so that at the end of the day we meet the high standards and expectations that Canadians have for us.
Thank you, Mr. Chair. I’m looking forward to your questions.
The Chair: Thank you, minister.
Before we move on to questions, Senator Maltais, could you please introduce yourself?
Also, Senator Cools after, to present herself.
Senator Maltais, could you please introduce yourself?
Senator Maltais: I think we know each other. I am Senator Ghislain Maltais from Quebec.
Senator Cools: Hello. I’m Senator Anne Cools from Toronto which, as we know, is in Ontario.
The Chair: Thank you, senators.
For the first question, the chair will recognize Senator Marshall. I would ask for the cooperation of all senators so that we can be succinct, to the point, and can permit all senators to ask questions on the first round.
Senator Marshall, the floor is yours.
Senator Marshall: Thank you, minister, to you and your officials for being here this evening.
My question is on the Asian Infrastructure Investment Bank and specifically the governance structure. I was looking at the schedule for the bank that was attached to the bill. I was looking to see what type of accountability information was being provided. The only reference I could see there was to audited financial statements, which is fairly basic.
My question is this: Given that there are going to be about 500 million taxpayer dollars invested in the bank, what information will you be providing to Parliament to demonstrate your commitment to transparency and accountability?
Mr. Morneau: Thank you, Senator Marshall, for the question. Perhaps I can just start with an overall point of view, and I am going to ask Paul Samson to address more specifics.
To start, the commitment we have made right now is for US$199 million, so the dollar figure is C$256 million. That is perhaps less than the share we might have originally hoped for as a member of the AIIB as we’re not coming in, in the first round of participants.
We do think this investment allows us to play an important role at this new multilateral institution. We believe that it will allow us to have a seat at the table, so to speak, in terms of ensuring that the organization acts in a way that will in fact improve the economies in Asia and encourage infrastructure investment there. Also it will allow us to bring our perspective to bear as they make those investments.
Additionally, it will enable us to provide opportunity, we hope, for Canadian organizations that might be part of those investments over time. We see it as enabling us to play an important role internationally as we’ve played in other multilateral institutions, to engage Canadian firms and, of course, as part of our overall goal of being engaged in infrastructure around the world and at home it’s entirely consistent.
With respect to the specific question on how we will report back to Parliament and in general make sure that people are apprised about our activities, I’ll ask Paul Samson to make a comment.
Paul Samson, Associate Assistant Deputy Minister, International Trade and Finance Branch, Department of Finance Canada: Thanks very much, senator, for the question.
There are two points I would like to make. The first one is that once Canada is a member of the Asian Infrastructure Investment Bank there will be a responsible director or other representative representing Canada. That will always be a conduit for questions and comments that would be concerning the bank.
For reporting to Parliament, we would do that through the ODA Accountability Act, which is an annual report coming to Parliament on all the expenditures that relate to the Government of Canada’s ODA budget.
Senator Marshall: You mentioned the directors. My understanding is that it’s not a given that we will have a director. It’s a given that we will have a governor, who I understood will be the minister, and that there will be 12 directors. Nine are from the region and then there are three that won’t be from the region. It’s not a given that we’re going to be a director.
Mr. Samson: To clarify, you’re right that we are not automatically a director but Canada will be the largest shareholder in the constituency it will be in, so it would become a director on a regular basis in that constituency.
Senator Marshall: The minister was saying $256 million right now but the legislation provides for US$375 million, which is about $500 million. It also says “or any greater amount,” so it could be even more than that.
My second question is: If the government wants a seat at the table, some of us are questioning why we are funding pipelines in Asia and not pipelines here. Why not fund infrastructure here instead of in Asia?
At what point are we going to assess or are you going to assess the benefits to determine if it’s worth the half a billion dollars that’s being invested in this bank?
Mr. Morneau: Well perhaps I can start. Again, the numbers, had we been able to join initially, would have been the up to amount of 2 per cent. That would have been consistent with the kinds of share that we have been able to achieve in other multilateral institutions.
The actual contribution is the number that I quoted for you, the US$199 million, so C$256 million. That’s just a little bit under 1 per cent, 0.99 per cent. That’s the only available share that is there at this point in time.
What I guess would be important to answer in the second part of your question is: We see, as we have been engaged in multilateral institutions in the post-World War II period at the International Monetary Fund, at the World Bank and at the European Bank for Reconstruction and Development, that has allowed to us play an important role internationally. Of course, it has allowed us to be engaged in those institutions. It has allowed us to play a role in making sure that the international system works well, and it has allowed us to play our part in building a global economy.
Of course, a global economy is critically important for Canada. Our economy is doing quite well right now, as you know. That does have, as one of the key reasons, the kinds of investments we have made in Canada, but we’re also the beneficiary of a strong global economy. We can only be successful with that strong global economy operating, so we see that as part of our role to do that.
We don’t see making an investment in the Asia Infrastructure Investment Bank as in any way mutually exclusive from making investments in Canada. As you know, in the course of our decisions over the last couple of years, we have decided to make very significant Canadian infrastructure investments, in fact going from a previous commitment of around $90 billion over the 12-year period that was in question when we came in, in 2015, to doubling to about $180 billion.
As you also know, we have said we want to make sure we can amplify that investment by creating institutions that attract even more capital to Canada. That was the driver behind the Canada Infrastructure Bank, which we think will leverage more investment into infrastructure in our country. We do believe that we need to do more than one thing at once as a significant global economy. We want to be part of the global economy. We also want to make sure we’re making investments in Canada. We believe both those two activities are critically important for today and also for our future.
Senator Pratte: Thank you, minister, for being here. My questions relate to the role of the Bank of Canada.
The first question would be regarding the amendments to the Payment Clearing and Settlement Act. Forgive my ignorance; maybe I should know that. I’m just wondering what is the rationale for these amendments, where that comes from exactly. I understand that the bank will now have more leeway when comes the time, if it ever comes, to issue directives to clearing houses. I am just wondering where that comes from.
Is that because of the financial crisis in 2007-08? I am just trying to understand the rationale here.
Mr. Morneau: Clearly we want to ensure we continue to have a payment system that is resilient, but I’ll let Rob Stewart answer, with more specifics, the background around that measure.
Rob Stewart, Associate Deputy Minister, Department of Finance Canada: Thank you for that question, senator.
The amendments to the act enlarge the powers of the Bank of Canada to deal with a situation in which a payment system institution could be at risk of failing. This is a duty they already have under the Payment Clearing and Settlement Act. It is entirely consistent with the work of the international financial community post-crisis to reinforce the ability to keep what they call financial market infrastructures operating.
In this case it adds to powers they already have to declare FMIs systemically important and/or prominent payment systems and therefore impose controls and oversight over them just to ensure that they are operated prudently. This is a backstop power but a continuing day-to-day power. The Bank of Canada needs provisions to reinforce that.
Senator Pratte: Is there also a link, or is that a totally different issue, to the amendment to the Bank of Canada Act that could apparently make loans to members of the Canadian Payments Association, including security in any property?
Is there a link or is that a totally different issue?
Mr. Stewart: That is a separate issue, senator, and it relates to the bank’s ability to provide emergency lending assistance to financial institutions. In this case what the amendments do is they broaden the bank’s capacity to take security, which is an important issue as we have seen from time to time. When institutions are solvent but run into liquidity problems, they can come to the bank for emergency assistance.
In this case this gives them the power to take mortgages without obtaining a first priority security interest on an individual mortgage basis, which is a very difficult thing to do on a timely basis. This allows the bank to exercise judgment and to take raw mortgages as security for ELA.
Senator Eaton: Thank you, minister. Again, it’s always a pleasure to have you with us.
Just to follow up on what Senator Marshall was asking you about the infrastructure bank, as you said we have a little less than 1 per cent and China, I understand, has about 30 per cent.
How much say will we actually have in projects that are approved? I understand your government and all of us should be very concerned about the environmental, labour and human rights standards that we would like to adhere to. Will they be required to adhere to those standards?
To follow on with that question, when you talk about Canada’s need for multilateral relations in the world I couldn’t agree with you more; but aren’t there countries that are closer to us in values like the TPP countries, for instance? I remember sitting on the ag committee, and there is a lot of potential for Canadian agricultural exports there. We should be deepening ties with them rather than pursuing closer integration with an authoritarian state which is 40 times our size and has a record of industrial espionage and theft of intellectual property?
I can understand, yes, China is there and it’s wonderful, but shouldn’t the TPP be given equal importance and maybe investment in some of the ASEAN countries that Canada is keen to join and become part of?
Mr. Morneau: Thank you, Senator Eaton, for your question.
There were a couple of things that I think you referenced in the course of that question. In the first instance I think the question was around the scale of our influence and the ability for us in particular to focus on environmental and labour standards for projects that might happen there.
Probably the best way to answer that question is certainly our influence would not be there if we are not part of the organization. Being part of the organization, of course, allows us to be at the table. I think it’s a fair thing to acknowledge that the size of our investment is less than it would have been had we joined in the first round.
There are no do-overs. We can’t go back and change a decision made in the past, but where we are now is that we are able to join. We are the first North American country to be able to join. We see this as an important demonstration of our commitment to the region.
I just recognize the fact that our second largest trading partner is China. This bank, which is an important institution for that region, is one that is not led by China but, of course, China is a very important part of this institution. It led the development and creation of it and set it off on its independent course. We believe it’s very important to be there.
I think your second point is questioning whether we should be, as well, engaged with the TPP 11 countries, I suppose the 11 that you are talking about. Probably you’re more directly talking about the other Asian members of that TPP 11. We think that’s important as well. That discussion is an ongoing discussion with those TPP countries to hopefully get to some form of agreement.
We’ve said quite clearly that’s a discussion we want to be engaged in. We believe we can improve that potential relationship. I will just say that we already are a member of the Asian Development Bank, the important development bank that is already in that region. That is another institution that we are part of.
Again, as a sizeable economy we think it’s important for us to be engaged at various multilateral institutions. This new AIIB, Asian Infrastructure Investment Bank, is important. The Asian Development Bank is important. The banks, the international multilateral institutions that came out of the Bretton Woods agreements, are also important.
We will continue to try to be engaged with our trading partners. China is an example but also the other Asian countries. It is all important. To prosper we think we need to be engaged in all those spaces.
Senator Eaton: Doesn't it worry you, minister, that President Xi Jinping has very clearly consolidated his power and made it very clear that he intends to keep operating a very authoritarian state-driven market economy? I hope you’re right that we’ll have some influence, but it doesn’t seem likely right now. He is holding two or three Canadians in prison for very little reason.
They don’t seem to be very responsive. The idea one gets, and perhaps it’s just fake news as President Trump calls it, is that in Prime Minister Trudeau's trip he was very gently told, “It’s our way or the highway.” With the 30 per cent against the 1 per cent, and then with Xi Jinping sort of having consolidated his power, I feel we’re being very optimistic and I hope you’re right.
Mr. Morneau: Again, I would come back to the situation we find ourselves in today with China as our second largest trading partner, a significant trading partner second after the United States. It is obviously an economy that continues to grow rapidly, an economy that we can foresee into the mid part of this century at reasonable growth rates that we project will be the largest economy in the world.
We recognize, in working with China on any potential trade agreements, that we will need to be very careful to ensure that we not only protect our interests in those trade agreements but that we also explain what is important to us in that relationship. We know that’s important.
We also know that thousands upon thousands of Canadian jobs are related to our current trading relationship with China. We know that is not only helping people in China but helping people in Canada to have successful lives.
We’re not saying it’s going to be easy, but we do believe that being engaged in those trading discussions is important and being engaged in the Asian Infrastructure International Bank is also important. It will allow us to maintain and, we hope, expand the prosperity of Canadians engaged in those activities with China.
Senator Eaton: Thank you.
Senator Forest: Thank you, Mr. Minister, for being here and for your great availability to the Standing Senate Committee on National Finance; you have met with us a few times now.
My remarks mainly have to do with the impact of the bill on the legalization of cannabis. I think it is a big challenge for Canadian society, and it will be a major challenge for Canada’s municipalities. I was very pleased to see in an article in Le Devoir that you were open to a more equitable sharing of excise tax revenues. The financial structure of municipalities in Canada is fragile because it is strongly linked to the property tax base, and therefore to real estate fluctuations. This revenue structure is no longer in keeping with the highly diversified responsibilities of municipalities because we are talking about housing and talking about — I know this because I worked in this municipal world for many years — of the day-to-day impact of this bill, which will be felt in the municipalities. Already, the federal government is helping to diversify this income with the return of the excise tax on gasoline, as well as with the return of the GST.
What I want — and we really are among friends here — is a commitment from you so that you can assure us that there will be a fair distribution of the excise tax. On a day-to-day basis, it will really be the municipalities in Canada that will be dealing with interventions, be it the control of consumption sites, consumption itself, and problems related to the impact that this legislation will have.
So I would very much like a commitment from you and to have you assure us, under the principle of subsidiarity, that there will be a good distribution of revenues based on the responsibilities that each level of government will have to assume in order to meet this major challenge that the legalization of cannabis will represent.
Mr. Morneau: This is a very important issue. In the past few weeks, I have had the opportunity to speak with the new mayor of Montreal. I have also spoken with Mr. Tory, the mayor of Toronto, and with the Federation of Canadian Municipalities. This week, I will speak with Gregor Robertson, the mayor of Vancouver. I know it is very important to assess the situation of the municipalities and how they will operate in a new regime in which cannabis is legal. We understand the situation.
The measure in the bill is really a measure that will help us to provide for tax coordination between the Government of Canada and the provinces. That is what we have right now. We are currently talking to the provinces to see how we can work together. We want to examine the challenges of our decision to legalize cannabis, the costs associated with it and how we can share the revenue.
Then, I hope that the provinces will work with municipalities to look at how they can share revenues. So we are working with the provinces and, I know there are still things to be decided. I cannot tell you exactly where we will go in the next few weeks, but it is clear that the federal, provincial and municipal situations need to be reviewed. We are looking at each situation to find a solution for sharing the revenue.
Senator Forest: The reality today is that the property tax, which affects more than 75 per cent of the revenue of municipalities, is used to finance traditional services such as waterworks, sewers and public safety. This is an area of responsibility for which you said that you would be willing to increase the share of the provinces as long as there is an equitable distribution of responsibilities. But it will surely end up with the municipalities.
That's sort of the commitment I want from you, Mr. Minister. And for that, you have my full confidence.
Mr. Morneau: Thank you very much.
Senator Andreychuk: Thank you, minister, for coming before us again.
I wanted to have you give us a little more explanation on the modified work schedule provisions, which I laud. I think they’re excellent. The difficulty I see is that they only apply to a narrow band of people who will have all these discretions that are built into the amendments you put in under the Canada Labour Code. As you know, we’ve been studying a lot about small and medium size businesses in the scheme of fairness, which is a term I think you have used often recently in our discussions.
Allowing people to take different types of modified provisions on benefits is laudable for the people within that sector, but what about those in small business who can’t really afford to do that with their own employees? How do we measure the impact it will have on all of those businesses whose employees would like to have the same flexibility? They simply will not have it. We are in the process already of talking about change changes to small and medium size businesses that, we are being told, are very traumatic to them. Now we see the comparison of the maternity leave.
Have you given any thought about what fairness would be to small and medium size businesses, and the impact of those changes?
Mr. Morneau: Certainly we have. What we are trying to do, as you well articulated, is to make sure we create labour standards that allow people to have the capacity to live their lives in the way we’re becoming accustomed to living our lives, given the changing nature of work, given the changing challenges that people face in getting to and from work, and given the changing family patterns that we have and we expect to continue to have.
That’s the driving force behind the increased flexibility we’re striving for in the workforce. We recognize the federal government has a role to act as the leader in those discussions. I will let Tony Giles provide a little more detail about the considerations we went through to get to this measure.
Tony Giles, Assistant Deputy Minister, Policy, Dispute Resolution and International Affairs, Labour Program, Employment and Social Development Canada: Thank you very much. It’s an excellent question because the changes to the Canada Labour Code apply to the federal jurisdiction. That includes, of course, a number of very large, wealthy firms, but it also includes thousands of smaller and medium size firms.
In designing these changes in the modified work schedule, the right to request flexible work arrangements. or other changes in the leave, first, we were very careful to consult both large and small organizations to see what impacts they could foresee. Second, we were very careful to try to design the legislation so that it was balanced.
If I could just take the example of the right to request flexibility work practices, it’s a right to request, an obligation on the part of the employer to consider and respond, but no obligation to actually accept if the employer has very good reasons. In doing it that way we were thinking specifically of small and medium size businesses where the loss of one or two employees can actually have a significant impact on their operations.
Throughout the set of legislative changes to the Canada Labour Code we’ve tried to accomplish that balance to address the needs of both large and small organizations, as well as the needs of employees.
Senator Andreychuk: I guess my point would be that it is very hard to say no. The capability to comply is limited, unless we actually look at small businesses. All the issues we have been grappling with need maximum flexibility because they don’t have the kinds of resources and employee bases they can work from.
It seems to be another pressure being put on a group that we are trying to encourage. We hear ministers going overseas and saying that small and medium businesses are the backbone of our economy and create the jobs. Yet, they are going to be struggling with exactly the issue that will be easier for the major corporations to deal with.
It seems to me we have to give more thought. I hope there will be some analysis we can look at, when we come to look at the budget again and track it, that it's not harmful to the very groups we say we want to encourage and are the backbone of our economy.
Mr. Morneau: We certainly recognize the point that you’re making. Of course the legislation, we think, was designed with the intent of ensuring we weren’t putting a requirement on these businesses but really saying, as the federal government again, we see ourselves as taking a role for federal employers and doing it in a way that allows larger organizations to move forward on these measures that are increasingly common in larger employers and providing an opportunity for smaller employers to consider them as well without a requirement to do so.
It’s a fair point. I would expect that I will get asked the question in future meetings with this group about how those measures are actually being implemented and used, and I’ll be happy to report back.
Senator Bellemare: Mr. Minister, thank you for being here. First of all, I would like to congratulate you on sections 8 and 9 of part 5 of the budget. As an economist, I became very interested in the workforce during my career. I think it is a great initiative that will ensure a balance. Some will say that it is not enough and others will say that it is too much, but I find that overall it opens a door that is desirable to improve employment conditions. In my opinion, this will encourage more young people, women and many people who are not yet working to enter the labour market, since they will have some flexibility in the organization of their work.
Having said that, I would like to ask you a question about section 9. I recently met with representatives of the Canadian Alliance of Student Associations, who produced a report on youth employment in Canada. They came to me, in particular, to ask us to oppose the use of unpaid internships, which they say do not encourage people to find work. According to their analysis, a person who does an unpaid internship is half as likely to get a job as someone who benefits from a paid internship. When the internship is paid, the employer arranges for the person to do tasks that have a value.
Could you provide more of an explanation on this? I understand that you want to improve employment conditions, but for young people — and we know that even if the unemployment rate goes down, many youth are unemployed, uneducated or not in training — internships are a good way to enter the job market. We also know that the transition from school to work is a problem. Can you explain the measures in the employment programs that you intend to start in order to increase the number of internships for young people in the labour market?
Mr. Morneau: Thank you very much. We think this is a very important issue. The unemployment rate among young people is in a better position now, but there is still work to be done. The challenges are not lacking.
We have established measures that we hope will enable less fortunate youth to improve their situation. Young people from well-to-do families have an advantage because they do not necessarily need paid internships, while that is not the case for everyone.
Effective measures have been introduced to this effect in recent years. We now have 65,000 summer jobs. It is important for young people to have a summer job. I think it works well. We will continue to work to improve the situation of young people. We are seeing good results, but we need to keep working.
Young people must have access to education without necessarily ending up with a significant debt on their hands when they finish their studies. That is why we doubled the scholarship for young people from low- and middle-income families. We have also established a system whereby these young people do not have to repay their debt until they have an annual salary of more than $25,000. This gives them the chance to start their careers without worrying about the burden of a large debt. In summary, we have implemented a number of measures: summer jobs, improvements to scholarships, and paid internships to improve the lives of the youth of today and tomorrow.
Senator Bellemare: I would have had some questions about the wage subsidy for jobs, but I think the Minister of Finance is less concerned about this issue than the people from the Department of Employment, who manage this file on a daily basis. So, thank you.
Senator Maltais: Welcome, Mr. Minister. I have a question for you that I asked the Minister of Canadian Heritage on Monday. She referred me to you in response. The circumstances are that I am replacing one of my colleagues on this committee tonight, so I will take advantage of this opportunity.
In January 2018, the Government of Quebec will amend its fiscal legislation in order to tax Netflix. At the time this legislation is sanctioned, according to the agreement with the federal government, the GST will be collected automatically. Are you going to cash in the revenue from this tax? Can you give it up with a simple letter? Will you agree to pocket the GST collected by the Government of Quebec?
Mr. Morneau: The digital economy has become a very important issue in Canada. We sincerely believe that it is essential to seek investments in our cultural sector. That is why the Minister of Canadian Heritage concluded such an agreement with Netflix. The Government of Quebec sees things differently, and it is perfectly entitled to proceed this way. For the moment, we are not considering imposing a tax on Netflix.
Senator Maltais: That means that the Government of Quebec will not have to collect the GST. Thank you very much.
The Chair: Honourable senators, we have a set time frame and, as mentioned, the minister will be leaving in the next five minutes.
Senator Cools, do you have a question?
Senator Cools: Yes. I was looking at Division 11 of Part 5 that amends the Judges Act. I was very interested that it is respecting the payment of annuities to judges. I have never noticed this before in a budget implementation bill, but I do know that the authority for the government to pay judges’ salaries, a very defined and refined passage, follows the British North America Act. Somewhere around section 96, 98 or 99 it says that the salaries of judges shall be fixed and provided by Parliament. It’s sort of a sacred and unique constitutional situation. For years and years the changes in salaries have always been conducted by a change that is recorded in the Judges Act.
Is this a new situation or a new way of doing this? Perhaps I have never noticed it before in the budget implementation acts.
Mr. Morneau: Since it is a very specific question that we want to get right, I will ask Ms. Dekker to answer this.
Senator Cools: It is very important.
Anna Dekker, Counsel, Judical Affairs, Courts and Tribunal Policy, Department of Justice: Good evening, my name is Anna Decker. I am counsel with the Judicial Affairs section of the Department of Justice. I can answer any questions pertaining to the Judges Act amendments that are contained in Bill C-63.
Senator Cools: The relevant section of the British North America Act, 1867, is section 100. Sections 95 and 96, through to about 101, are all about the judges. The Constitution Act, 1867, says:
The Salaries, Allowances, and Pensions of the Judges of the Superior, District, and County Courts (except the Courts of Probate in Nova Scotia and New Brunswick), and of the Admiralty Courts in Cases where the Judges thereof are for the Time being paid by Salary, shall be fixed and provided by the Parliament of Canada.
I was noticing it because I have done a lot of work on the history of that section of the British North America Act. Maybe it has been done before, but I have never noticed amendments to the Judges Act being done by way of a budget implementation bill.
Ms. Dekker: Any changes to judicial salaries have to go through a commission process. Recommendations are given to the government and accepted or reasons given for not accepting them. Because the amendments have to be contained in a bill that goes to Parliament, the Judges Act fixes the salaries.
The Quadrennial Commission is the three-member commission process that makes the recommendations. Any recommendations that are then accepted by the government and implemented do have to be done through a bill. They have in the past been in the BIAs, budget implementation acts. For example, the implementation of the most recent Quadrennial Commission in BIA 1 just this year was done through the Budget Implementation Act. That also had amendments to the Judges Act in it.
Senator Cools: Perhaps it was just my own unawareness of something. Trust me, I know a lot about the history of judges' salaries.
The Chair: I recognized when the minister came in that it would be six o’clock, and according to the Web it is 6:01.
That said, Mr. Minister, I would like to thank you for taking the time to appear before our committee.
You have been very generous with your time. In the event that we need additional clarity or information, I know that we will be calling your officials.
We will continue with the officials of the Department of Finance. Minister, before we close, do you have a comment?
Mr. Morneau: I would simply like to thank you. It is always a pleasure to be here.
I would like to thank you again. I am quite happy to be here and again encourage you. We are trying to continue the work that we were elected to do, which is to continue on the course of successfully growing our economy and making sure that Canadians see the benefits of that growth.
Thank you, again. If you have any other questions, we will be pleased to appear before your committee again. Thank you.
The Chair: Honourable senators, we will continue the meeting with the executives.
We have from the Finance Department James Greene, Senior Adviser, Tax Policy. Thank you, sir, for being present.
We also have Pierre Leblanc, director of the Personal Income Tax Division of the Tax Policy Branch.
We also have Trevor McGowan, Director General, Tax Legislation Division, Tax Policy Branch.
I have been informed by our analyst that we will proceed with Bill C-63, of which we each senator has a copy.
The format will be that you will make your presentations and give your comments on the basis of Part 1, and then we will go to Part 2 and the following. You will touch on Part 1, (a) to (k), following which questions will be asked as we proceed by the senators.
Is that the right norm for the officials, so that we will have clarity and precision?
Trevor McGowan, Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: That is perfect. Thank you.
I will provide a brief overview of Part 1 of Bill C-63 which relates to income tax amendments.
Part 1 contains a number of measures that were announced as part of the March 2017 federal budget, including the requirement to remove the classification of drilling a discovery well as a Canadian exploration expense, 100 per cent of which would be deductible in the year incurred and would become what is called a Canadian development expense deductible at a rate of 30 per cent per year.
It would also eliminate the ability for certain small oil and gas companies to reclassify up to $1 million of Canadian developmental expense which, as I noted, is a deductible essentially at a rate of 30 per cent per year as fully deductible Canadian exploration expenses.
It would revise the anti-avoidance rules relating to registered education savings plans and registered disability savings plans to bring them in line with existing rules that relate to tax-free savings accounts, registered retirement savings plans and registered retirement income funds.
It will provide enhanced tax treatment in respect of eligible geothermal energy equipment. This includes an accelerated capital cost allowance rate which is essentially a tax depreciation of 50 per cent, as well as the ability to renounce or effectively transfer certain expenses associated with geothermal projects to investors through the flow through share mechanism.
It would extend the base erosion rules that currently apply in respect of foreign affiliates of Canadian corporations to foreign branches of Canadian life insurers, which for many practical purposes in the act are taxed similarly to foreign affiliates.
It clarifies the rules relating to factual control, referred to as de facto control in the Income Tax Act, in response to a recent court decision to essentially bring the law back to where the government felt it was before the court decision and clarify that all relevant factors ought to be taken into consideration in determining whether an individual has control of a corporation.
It would introduce an election relating to the taxation of derivatives for taxpayers that hold their eligible derivatives as income property or an income account. Instead of being based upon the baseline treatment of those derivatives, which would be taxation on the realization basis, it would allow them to be taxed on a market-to-market basis.
It would also introduce, again relating to derivatives, a specific anti-avoidance rule intended to prevent the inappropriate deferral of tax through the use of what are called straddle transactions.
It allows a tax deferred reorganization of a switch corporation. That is a mutual fund corporation organized as a multiple class corporation where each class of shares of the mutual fund corporation is itself a separate mutual fund. It allows that to split on a tax deferred basis into a number of separate mutual fund trusts.
Lastly, for the measures introduced as part of the federal budget this year, it contains a number of measures relating to the Ecological Gifts Program, intended to ensure the continued protection of ecologically sensitive land that has been the subject of the gift, as well as ensure the proper operation of the rules.
In addition to the measures announced as part of the budget, it contains a number of measures that had been confirmed as previously announced measures where the government confirmed its intention to proceed with the amendments.
The first package was initially released in October 2016. It relates to the sale of a principal residence. Long-standing tax rules provide a tax exemption for a family on the sale of their principal residence. These amendments are intended, first, to enhance the information reporting requirements to the Canada Revenue Agency and, second, to ensure the rules operate as intended.
Next, it follows up on a measure contained in the first budget implementation bill that was announced as part of the 2017 budget that extended the ability to certify eligibility for the Disability Tax Credit to nurse practitioners. As the minister noted, for many Canadians that’s often their first and most frequent contact with medical practitioners in Canada. Based upon feedback received after the announcement of that measure, the ability for nurse practitioners to certify various things for purposes of the tax rules is going to be expanded to give them more powers of certification in a number of appropriate contexts.
Next, there are amendments relating to a measure announced as part of the 2016 federal budget. These revise and improve those measures so they apply appropriately and do not prevent access to the small business deduction for qualifying farmers and fishers selling to an agricultural cooperative.
The 2016 measure prevented the inappropriate multiplication of the small business deduction through the use of a central entity where a number of shareholders or partners in the company carrying on the business sought to inappropriately multiply access to the small business deduction. That concern does not arise with agricultural cooperatives, so they would be specifically excluded from the rules.
Last, there is a package of amendments that relate to a number of specific technical tax changes to the tax rules. Our tax act is very complex. From time to time, in order to ensure that it continues to operate efficiently and effectively, a number of technical changes that do not represent changes to policy need to be made. These range from purely what might be considered housekeeping measures updating cross-references and the like, to measures to ensure that highly technical rules operate as intended, perhaps in situations not envisioned when they were originally enacted.
That is a summary of all the measures contained in Part 1 of the bill.
The Chair: That would be the summary of all the elements in Part 1 from (a) to (k).
Mr. McGowan: Yes, (a) to (k) in the list of measures announced as part of the federal budget and then also (a) to (h).
The Chair: Also (a) to (h). Thank you very much. We will go to questions.
Senator Marshall: This is a question I had for the minister for the second round but we ran out of time. This would fall under the amendments to the Income Tax Act.
We had hearings across Canada on the proposed tax changes. For the income splitting in the file update, which I guess the minister presented, it said that for the income sprinkling revised draft legislative proposals would be released later this fall.
Is it somewhere in this document?
Mr. McGowan: No, the revised draft legislative proposals relating to the income sprinkling measures announced in July 2017 are not included in this bill. It is intended for a separate release.
Senator Marshall: Will we still get it? This is the fall, and we have a couple of weeks left. It says that a revised draft will be released later this fall. Do you know whether we’ll get it before we adjourn before Christmas?
Mr. McGowan: I can’t comment on the specific timing of the release beyond what has been stated publicly, that it’s intended to go out this fall.
Senator Marshall: Early on in your remarks when you talked about drilling expenses, I thought you said that 100 per cent writeoff used to be allowed, but now it would depreciate at the rate of 30 per cent. Did I understand that correctly?
Mr. McGowan: That’s true in respect of two separate measures contained in the bill. For qualifying, generally speaking, resource expenses there are two complementary regimes. One is the Canadian exploration expense set of rules. Those provide for a 100 per cent writeoff in the year incurred. The technical mechanism actually involves putting them into a pool and then deducting them 100 per cent, but it’s a 100 per cent writeoff. Those are for more current expenses.
Beside that, there are Canadian development expenses which are more capital in nature. Those allow for a deduction of 30 per cent. It’s more preferable to have the 100 per cent deduction than the 30 per cent for Canadian development expenses.
Two measures relate to whether certain expenses — in one case test oil and gas — can be classified as Canadian exploration expenses versus Canadian development expenses. We can talk about those, but the tax proposals in the bill don’t change the fundamental regime of having the 100 per cent deductible exploration expenses or the 30 per cent deductible Canadian development expenses. Rather, it touches upon whether small oil and gas companies can have up to the first $1 million dollars of qualifying expenses reclassified as Canadian exploration expenses when they would otherwise be development expenses.
James Greene, Senior Advisor, Tax Policy Branch, Department of Finance Canada: The cost of drilling a so-called discovery well was traditionally treated as an exploration expense. With changes in technology, the vast majority of discovery wells now are successful wells that go on to produce. The proposal in the bill is to treat that as a development expense which should be amortized over time.
Senator Marshall: At 30 per cent.
Mr. Greene: At 30 per cent a year, which is the usual treatment for development expenses.
Senator Marshall: What impact would that have on government revenues?
Mr. Greene: The estimated revenue impact was set out in the budget. The measure on discovery wells is estimated to increase government revenues about $50 million a year starting in 2019-20.
Senator Marshall: I would think the companies impacted by that aren’t very happy with that change.
Mr. Greene: We have not had direct criticism of the measure. This measure is one of a number of steps that governments in Canada have taken over the past 10 to 15 years, consistent with the G20 commitment to phase out inefficient fossil fuel subsidies. The current government indicated in its election platform that it was committed to meeting that commitment, and it was in the mandate letter of the Minister of Finance. The issue of re-examining the treatment of exploration expenses was in the mandate of the minister, so I don’t think it came as a surprise to industry.
Essentially, it’s pulling back an incentive provision to return the tax system to essentially a neutral treatment with respect to these expenses so that the decision is based on market factors rather than being influenced by a tax incentive.
Senator Marshall: I’m from Newfoundland, so this would affect companies in my jurisdiction.
Senator Forest: I would like to further explore the question asked by my colleague Senator Marshall. Given the actions and position of the United States to support its oil and gas production, will these measures make Canada less competitive in its efforts to develop its oil and gas resources?
Mr. Greene: Thank you, senator. The issue of competitiveness is obviously a major concern of the government. Competitiveness, of course, has many different factors. The tax system is one factor. It’s an important one.
In the oil and gas field, of course, the royalty regime, which is under provincial control, is even more important. It’s another fiscal instrument. In terms of oil and gas exploration, it weighs even more heavily than the tax system.
The government takes the view that these sorts of considerations around oil and gas development also need to be positioned within the broader context of climate change. Canada and other G20 countries have agreed that they will gradually phase out subsidies that have been provided which encourage and sort of tilt the playing field in favour of promotion and use of fossil energy sources, so that in a sense we are not, on the one hand, trying to move toward cleaner energy production while, with the other hand, still trying to subsidize fossil fuel production.
In terms of impacts this is a relatively marginal change. It’s a change in the rate of writeoff for one category of expenses. It’s an important category of expenses, obviously, but it’s returning the tax treatment in this sector to what in a sense is the norm for assets of this kind that create value for companies over time. The normal rule is that those sorts of expenses should be amortized rather than immediately deducted.
Senator Eaton: I am sure you can answer this question very easily. It’s on page 1, the bill-basis accounting. A law firm will have to put in their tax return for their ongoing work. They’ll pay the tax for their ongoing work. Even if the case is not settled, they will still have to pay the tax on it, right?
Mr. McGowan: As you noted, it is the elimination of the potential to elect to use a bill-basis accounting system as opposed to the more general accrual system that applies to most other professionals listed in the measure which includes lawyers.
Senator Eaton: Lawyers, dentists, medical doctors, veterinarians and chiropractors. If I’m in the middle of a treatment with a chiropractor and he says, “I’ll bill you at the end of your treatments,” which will be in the next fiscal year, he’s paying taxes on the whole thing.
Mr. McGowan: What it does is it prevents —
Senator Eaton: I’m not asking what it prevents. Is that correct?
Mr. McGowan: Not exactly. The best way to describe what it does is to step back a little bit. The general rule is that you pay tax on income in the year that it is earned. For the designated professionals the rules sort of allowed them to elect to include their work in progress. This is inventory for them in the year in which the bill is sent out, on the basis that it has been billed. This measure would prevent the ability to elect into that deferral.
Senator Eaton: I’m a lawyer and you’re my client. I’m doing work for you on an ongoing basis. I know that our work will continue into the next fiscal year. How do I pay taxes? What do I declare?
Mr. McGowan: What this measure would do is say that during the year you value your inventory which includes your work in progress. That’s your unbilled time as a lawyer. You include that in inventory, generally speaking, on the lower cost and fair market value basis. For lawyers there is a rule that the fair market value of their work in progress is the amount they expect to recover at the end of the year.
By recognizing in the year the inventory at the lower cost and fair market value, you are not bringing the full fair market value of your work in progress, being the number of hours billed multiplied by your rate.
Senator Eaton: Or you think you would bill. This is what I’m interested in.
Say at the end of 2017 I’ve billed you X for my billable hours. I know we are on an ongoing mergers and acquisitions thing to March 2018. Does that ongoing to March 2018 count as inventory for 2017 tax purposes?
Mr. McGowan: No. It would just be the hours of your work in progress up until the end of 2017. The full amount of your billings wouldn’t be included. It would be the lower of the cost associated with that file and the fair market value, being the amount you expect to bill, which is subtly different than, of course, the number of billings.
As a lawyer myself, I know that you don’t always bill 100 per cent of your time. It’s based upon what you reasonably expect you are going to make as a receivable.
Senator Eaton: What you would collect in the future, in 2018.
Mr. McGowan: Right. For example, pro bono work that you know you will not bill out would be nil fair market value. While you might have $100,000 of billings on a file and it’s likely that you’ll only collect $80,000 of it, and that’s reasonable, then the fair market value would be $80,000. Again that has to be compared with the cost associated with the file, because you base your inventory on the lower cost and fair market value.
If your cost is 20 and your fair market value in my example is 80, then the lower would be 20. If it is the 80 amount, which is your accrued billings that you expect to send out at the end of the year, that would, of course, make your tax much higher.
By choosing the lower cost and fair market value it effectively sets off your costs for the year against that revenue and better matches them, which provides a truer picture of the taxpayer’s income.
Senator Eaton: Will you be able to deduct your future expenses? If I know that my merger contract with you to 2017 is X, but I figure that I have another three months of expenses until the end of March, do I get to deduct those expenses as part of my expense inventory?
Mr. McGowan: The amount for any particular year is going to be the costs during that year, as well as your work in progress until the end of that year. You’re not including future unearned revenues in a particular year. Nor are you including future unincurred costs. It’s really just what happens in that year.
Senator Andreychuk: I have a supplementary question to my colleague’s questions. I understand the large law firm. You have managers who manage the lawyers now. Billable hours are all set. Your clientele is figured it out. You can put your pro bono here because everyone takes a turn at it, et cetera.
I’m from a province where there are still a lot of small practitioners. They’re telling me that they have an idea of what that file might bring but they really sit down later and say, “Can my client afford it?” They are dealing with small businesses, et cetera, and they don’t weigh what the full cost is until they finish because they don’t know what is going to happen.
A lot of it is not so neatly figured out, as you might be able to do in some of the bigger files, if you are talking about mergers or corporate. If you’re doing a lot of small business, you really don’t know where you’re going to go with that client until you finish. Then you sit down and assess what would be fair to that client.
You’re now asking them to sit down halfway through and try to figure it out. It could be a year or two years. You’re not letting them have as much discretion with their clients. You’re really impinging on their ability to service their clients. They say they’re professionals and they want to service their clients. It isn’t all about getting the money.
They are going to spend more time with the tax people justifying what they have done or not done. Why are we going down this route? How much money are we really going to get from this?
Pierre Leblanc, Director General, Personal Income Tax Division, Tax Policy Branch, Department of Finance Canada: Senator, on your question on revenue impacts, this will be phased in over a five-year period. That’s one of the changes that was made because draft legislation was put out. Then, on the basis of what was received, the phase-in period was extended from two years to five years.
Basically over the fiscal period in the budget, which was from 2017-18 to 2021-22, it’s estimated that the increase in federal revenues would be about $355 million. Then there would just be one extra year of revenues beyond that.
Senator Andreychuk: I would be interested in getting something in writing later so that we can monitor this.
How did you come up with the figure that you did? How did you assess what law firms or businesses are doing now?
Not for this purpose but for our ongoing study I think it would be very helpful to know how you arrived at that figure.
Mr. Leblanc: Sure, we can provide a general explanation.
Senator Andreychuk: I noticed that on this enhanced protection of donated ecologically sensitive land you’ve excluded private foundations as eligible recipients of the Ecological Gifts Program. Why have you done that?
Let me tell you the concerns from my province where we are trying to keep a lot of the land or reclaim it back to what it was. Some of it is the ranching land that we are letting go back into its original state.
A lot of people are donating it but want to keep an eye on it to ensure that it is properly handled, whether it’s by the government or by some other source. I have been very involved in this field. I’m just wondering why you are excluding private foundations, which is often a vehicle they use.
Mr. Leblanc: Thank you for the question. Today, as part of the eco gifts program, very few donations have been made to private foundations. Generally, it has been either to charitable organizations or to public foundations.
To pick up on something you said, the idea is making sure on a long-term basis that the land is used in ways that were intended at the time of the gift. The thinking there is that is best achieved with an arm’s-length board of directors. That’s something we know that charitable organizations and public foundations have.
That’s basically the rationale.
Senator Andreychuk: Have there been any abuses? Normally, you put in a rule when you find that there has been some abuse and some misuse.
Mr. Leblanc: Not in any significant way. It’s done on a prospective basis.
Senator Andreychuk: Strange.
Senator Pratte: Coming back to bill-basis accounting, I often wonder why I’m on this committee because I find so many things difficult to understand. If I understood correctly, you estimate that the elimination of bill-basis accounting will bring $350 million more into the government’s coffers eventually.
Mr. Leblanc: That’s over a five-year period, from 2017-18 to 2021-22.
Senator Pratte: I’m missing something here because all this system does is allow these designated professionals in a way to defer income from one year to the other.
How does that bring in more money? In the long term it shouldn’t really bring more money to the federal government because it’s just deferred revenue.
Mr. McGowan: That’s absolutely correct. It’s not reflected in the numbers that my colleague Mr. Leblanc gave because that’s over the next five years and the phase-in period extends for longer.
If you look to the numbers provided as part of the 2017 federal budget and the tax measures supplementary information, when it was a two-year phase-in you’ll note that after the phase-in period the numbers were reduced to straight lines, which effectively represent nil. The phase-in period represents the period during which the tax deferrals that have been accruing and have been ongoing get taken away. Then after the phase-in period the projected revenues would cease.
Senator Pratte: You have sort of a bump for the first few years and then it stabilizes.
Mr. McGowan: Yes.
Senator Pratte: This system was an exception for these designated professionals. If you compare that to other “businesses,” this capacity to defer income was really an exception even though a business, for instance, would not be able to declare income that is earned in a specific year. Even though it’s not billed or received, they would not be able to push it back for the next year or defer it to next year. I am correct, right?
Mr. McGowan: That’s absolutely correct.
These rules only apply with respect to the designated classes of professionals, but an engineering firm or an architectural firm has to use the same accrual rules that the six designated professionals will have to move into. They have had to use those since the 1980s.
As part of the tax expenditure review undertaken by the government, they looked at a number of tax expenditures, credits, deferrals and the like, and looked at whether or not they were continuing to meet their initial stated purpose. Initially, back in the 1980s when there was that general shift to accrual accounting away from bill-basis, these designated professionals were allowed to elect to continue to use the bill-basis accounting system. They were not entitled to access a lower small business tax rate of 25 per cent, I think it was, either because of restrictions on incorporation or because their types of corporations weren’t allowed to have the same lower small business rate. Instead of the 25 per cent, they would be taxed at 33 per cent.
The differential, of course, no longer exists that a lawyer in practice can get the same small business deduction as an architect or an engineer. The initial justification for maintaining this tax preference for the enumerated professionals has gone away.
Senator Pratte: That’s very useful. I want to make sure I understand the extension of base erosion rules for Canadian insurers. I understand the rationale a bit.
Was there a specific problem that you are trying to address? Has there been anything going on that you saw? Is there any idea of what revenue the government will get from this?
Mr. McGowan: I don’t believe we’ve booked any revenue for this, but that is not to say there wasn’t significant activity going on.
This was widespread and significant tax planning in the foreign affiliate context. That, at least as the tax system goes, is similar to how foreign branches of Canadian life insurers are taxed. If you have a foreign affiliate or subsidiary in another country that is carrying on active business in that country, and if we have a tax treaty or a tax information exchange agreement with that country, Canada doesn’t tax that income.
At the same time you have a set of rules where Canada retains its right to tax income that is sufficiently connected to Canada even if it’s moved to a foreign affiliate. One of those things is the insurance of Canadian risks such as house insurance for people residing here.
I don’t want to get too technical, but planning undertaken in the corporate context with foreign affiliates where a portfolio of Canadian risks was transferred to a foreign affiliate, which then transferred to a foreign bank counter party that entered into a total return swap with the foreign affiliate of the Canadian company, thus providing the Canadian foreign affiliate with the economic exposure to the Canadian portfolio without technically having ownership.
All that to say, that type of planning was certainly seen in one context. The department received information. We understood there were promoters or tax planners advising clients that had worked in this one system could now work in the insurance context because the foreign branch of a Canadian insurance company is essentially exempt from tax in not exactly the same but in many similar ways as a foreign affiliate does.
In order to prevent that type of tax planning from occurring, these rules were announced to prevent it. It is preventive in the sense that it has not been happening in the insurance sector, but it certainly was happening in the broader financial services industries.
Senator Pratte: Thank you.
Senator Maltais: To go back to the issues of billing raised by my colleague Senator Andreychuk, we can drop the professionals, but those small companies include one category of Canadians. Let me give you an example: Canada is the king of free-trade treaties. A lot of exporters give their products to brokers to sell. They sell those products in other countries, for example, under the Comprehensive Economic and Trade Agreement between Canada and Europe. However, they are not paid right away. Some payments may be made over two financial years. How are you going to handle that?
Mr. McGowan: Thank you for your question. This measure only applies to the classes of professional businesses that were provided the ability to elect into the bill-basis accounting system. Those are accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors, so this measure would not have any impact on businesses outside of those categories.
Senator Maltais: Does that mean that there will be no impact on self-employed workers?
Mr. McGowan: It would only affect those types of professions but if you had, say, a lawyer who carried on business through a sole proprietorship or even with a partnership, then it could apply to them. It’s not limited to corporations but it is limited to those classes of professionals.
Senator Maltais: Mr. Chair, could we get some written information on that? We have asked for it, but it has not yet made its appearance. I want an answer in writing.
The Chair: Could we please follow up through the clerk with a written answer from the officials on that specific question? There was also a question that was raised earlier by Senator Andreychuk to be followed up on. Again I remind the officials to please verify and for clarity send the answer to the clerk?
Mr. McGowan: Of course.
Senator Andreychuk: I hope I’m in the right place. Regarding nurse practitioners, what concerns me is the fact that nurses understand mental and physical impairments, et cetera, from the nursing profession. We’re going to load on them the making of evaluations vis-à-vis the tax.
Are they getting any training? How are we going to handle this? Doctors have been doing it for years, but it has been built into their education and continuing education systems. I fully appreciate there are areas in our country where there are no doctors and nurse practitioner will benefit the communities, but I’m concerned about loading on nurse practitioners this capacity for which you really need your accounting degree or something else.
Has there been any training? Will there be any training? Is there any tool kit for them to understand what they’re certifying, what the objectives are, and what the consequences are?
If you sent me out I can be a nurse, but all of a sudden I’m getting eligibility criteria and everything which change constantly. How are they going to be able to manage this? We don’t want to put a responsibility on them without giving them the tools to do it appropriately.
Has that been factored in? Is there some money being set aside for training, et cetera? What evaluation will we be making of this?
Mr. Leblanc: One idea is to focus on nurse practitioners, given their specific role, especially in diagnostic cases, that puts them more on par with physicians in that respect.
Both the initial change announced in the budget and legislated in the first Budget Implementation Act and the subsequent changes to specific features of other tax measures were something nurse practitioners were very keen to get. This is a role they are very keen to play, according not only to the Canadian Nurses Association, a group we heard from often, but also their provincial counterparts.
They could tell you more of the details but they have been very interested in getting the word out to their members on the new opportunity they have, on the role they’ll play, and on the information they can help provide.
There is no specific funding set out for training. It’s just more the government’s general role to help facilitate that information and to make sure it’s there for them. What we’ve sensed is a lot of excitement among the community of nurse practitioners that they now have this role.
Senator Andreychuk: I appreciate the excitement. I’m more concerned with the capability to handle this. If you are denied, say, a certificate, it’s not that they will do it. It’s when there is a conflict or a difference of opinion. How are we going to justify this?
That’s where the training would come in. It’s an exciting new field and I would want to participate in it, but I would also want to make sure I can handle it and that the government was giving me support and not leaving me out there when a problem arises.
I say that having worked in the field of family law. We have some of the most dedicated people in nurses and social workers, et cetera, who want to help, but we have to make sure they have the right resources to do the job and not then have to go through inquiries afterward as to what happened.
Mr. Leblanc: It’s an important point you make and we’ll take it on board.
The Chair: Are there any other questions?
Senator Marshall: On work in progress, I was having second thoughts about raising it again. Just to follow up on what Senator Pratte was saying, for the work in progress there are no extra revenues there for the government in the long term. It’s just a matter of timing, is it not?
Mr. Greene: In the long term it is not a cost that is booked, but it means that on an ongoing basis there is a continuous deferral. It means government tax is paid on a later basis than it otherwise would. If you look at that from a present value point of view, that’s a real cost for government just as it would be for a private business.
We don’t often put a value on that because we look at current values, but it is a real fiscal cost.
Senator Marshall: Forget about the time value of money. I know you can’t but yes, it makes no difference.
The Chair: Before we move on to Part 2, I have a question for clarification. I almost said that bill-basis accounting almost led me to creative accounting but, to the officials, I will not go there.
To follow up on the questions of Senator Eaton, Senator Marshall and Senator Pratte, how many designated professionals would be affected by this proposed change? Do you have numbers?
Mr. McGowan: No, I do not believe we have an exact number of affected professionals.
Mr. Leblanc: Perhaps that’s something we can look into. As part of the question posed by Senator Andreychuk, we can look at providing that information in written form to senators.
The Chair: Absolutely in written form. As a follow-up to Senator Marshall’s question what would be the impact of the proposed changes on federal revenues? Would you have that figure?
Mr. Leblanc: It’s probably best that we put that in written form so we have that with us.
The Chair: When we talk about written form, will we have that before Christmas?
Mr. Leblanc: Yes, it will be in your stocking.
The Chair: We intend to table a report on the study of it. Hopefully we can bring it to the attention of the clerk of the National Finance Committee in the next 10 working days.
Mr. Leblanc: For sure.
The Chair: I have another question before we go to Part 2. With the finance officials who are here, there is no doubt that you could provide me with this information. It is on the Canada Mortgage and Housing Corporation.
If the officials can't provide the information tonight, perhaps it could be answered in writing to the clerk.
We have learned that CMHC is providing the government with $4 billion in special dividends over the next two years. It is also our understanding that CMHC has never paid any dividends since its creation in 1946. At the same time CMHC has been raising insurance fees which ultimately hits middle class Canadians in their quest to buy their first home.
Why is the Canada Mortgage and Housing Corporation raising insurance fees when it has the money on hand to lower them?
Subject to that, I have a supplementary question based on my experience when I was minister of housing in New Brunswick. Is this increase from CMHC due to the increased risks resulting from the real estate market in specific parts of Canada?
Mr. McGowan: Unfortunately, that falls outside of our area of expertise being the income tax, in particular in connection with Part 1 of the bill.
Mr. Leblanc: Probably it is best to endeavour to get back to you on a timely basis in written form as with these other questions. We’ll find the colleagues who are best placed to answer that.
The Chair: To the officials of Part 1, we say thank you very much for sharing your information. If you could follow up, we would certainly appreciate it.
We will now move to Part 2. I will ask the officials of Part 2 to come forward. The officials are Pierre Mercille, Director General (Legislation), Sales Tax Division, Tax Policy Branch; Carlos Achadinha, Senior Director, Sales Tax Division, Tax Policy Branch; and Mark Walsh, Director, Sales Tax Division, Tax Policy Branch.
I would ask the officials in their comments to walk us through Part 2, (a) to (e), hopefully to be completed this evening. Can I ask the officials who will be first?
Mr. Mercille, can you provide us with your comments and with more specific explanations? There will be a period for questions immediately afterwards.
Pierre Mercille, Director General, (Legislation), Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Thank you, Mr. Chair. Part 2 of the bill implements measures related to the GST and HST. The amendments begin at clause 106 in the bill and finish at clause 164. I will describe the measures generally in the order in which they appear in the summary, with an exception that makes things easier to understand.
I want to mention that all of the amendments in Part 2 of the bill are technical in nature and generally correct small deficiencies to ensure that the rules apply as intended. All of the measures in Part 2 of the bill, except the measure about the public service body rebate that I will explain later, were released for consultation in the summer of 2016. These measures have all been confirmed in Budget 2017. They were also rereleased for consultation in the summer of 2017 with a small number of improvements. Following that consultation, no request for amendments were submitted to us by stakeholders.
The first measure makes technical amendments to the GST/HST pension plan rules. Existing GST-HST rules ensure that pension plans receive the same GST treatment whether pension expenses are incurred by a participating employer in a pension plan or whether the expenses are incurred directly by a pension entity which is a pension corporation or a pension trust.
These rules also provide for a 33 per cent rebate of the GST/HST to pension trusts and pension corporations. These GST/HST rules are fairly sophisticated and are relatively recent since they have come into force in 2009. Certain small deficiencies and mistakes have been identified over the years by stakeholders, by the CRA, and internally at the Department of Finance.
The amendment in Part 2 of the bill in respect of pension plan rules essentially makes technical amendments to those GST/HST rules to clarify certain points, correct technical deficiencies or errors, and simplify compliance.
The second measure in Part 2 of the bill deals with the GST/HST treatment of master trusts and master corporations. Master trusts and master corporations essentially hold and invest funds of individual pension plan trusts and pension plan corporations in order to pool the money together, diversify the risk and reduce costs.
Regarding the amendment in Part 2 of the bill, in 2009 the application of those rules to pension plans, master trusts and master corporations were not contemplated, but at this point the rules ensure that the same GST/HST treatment applies to pension plan related expenses, whether the funds of a pension plan are invested in a single pension trust or pension corporation, or whether they are invested in a master trust or master corporation.
The third measure makes technical amendments to the GST/HST rules for financial institutions. Financial institutions are subject to special GST/HST rules under the GST. This is due to the complexity of the financial service industry and the fact that because financial services are exempt under GST/HST financial institutions are generally not allowed to recover the tax they pay on input they use to provide those services.
Again, these rules are fairly sophisticated in certain cases and anomalies are identified from time to time. The measures in this case in Part 2 of the bill make technical amendments to the rules to clarify certain points, reflect amendments to the Income Tax Act because some concepts of the Income Tax Act are incorporated into the GST legislation, and simplify compliance.
The fourth measure in Part 2 of the bill makes a technical amendment to the GST/HST drop shipment rules. Essentially the drop shipment rules help Canadian suppliers that sell to non-residents by ensuring that non-resident businesses do not incur unrecoverable GST/HST when they acquire goods in Canada. These transactions are fairly sophisticated. They are between residents and non-residents. With the absence of that kind of relief, non-residents would have a disincentive to buy from Canadian suppliers.
The amendments that are in Part 2 in respect of those rules provide a new relief mechanism. This is just because an existing relief mechanism was proven not to be applicable in these very specific circumstances for technical reasons.
Another amendment is to ensure that these rules are extended to the application of the drop shipment rules to certain lease transactions and to make small improvements overall to the rules.
The fifth measure relates to municipal transit. Municipal transit services supplied by a transit authority are exempt under the GST/HST. The measures in Part 2 of the bill clarify that the GST/HST exemption for municipal transit services can also apply to the supply of tickets, passes and other similar rights that entitle the person to a municipal transit service.
The amendments are made to reflect the modern way in which the municipal transit services are sold to people through passes and tickets, which in legal terms may be better characterized as a supply of a right as opposed to a supply of a service. The GST legislation in the exemption provision only refers to a service. In practice, these amendments should not change much because they essentially qualify the way the CRA has been interpreting those provisions over the years.
The sixth measure improved the manner in which a public service body can claim a public service body rebate for the GST/HST. Public service bodies are entities for the GST/HST legislation such as municipalities, schools, universities, public colleges, public hospitals, charities, and substantially government funded non-profit organizations.
The amendment essentially provides these public service bodies with improved flexibility in claiming their public service body rebates. It generally allows a public service body to claim in a subsequent claim period a rebate in respect of GST/HST paid in a previous reporting period, and this is for a period of two years.
In practice, this doesn’t change the amount of rebate a public service body is entitled to, but it’s a simplification measures. If you have an invoice with tax on it and you forgot to claim the rebate in a rebate claim, it’s easier to claim it in a subsequent claim period than to go back to CRA with an amended rebate claim for your previous period.
The last measure in this part makes administrative amendments affecting the GST/HST in order to improve the clarity and consistency of the legislation. The measure therefore does not affect the way in which the GST/HST is applied. It is intended to provide consistency between the English and French versions of the legislation. It clarifies some concepts, corrects references, and makes amendments that have to do with the two legal systems. That is to say, it ensures that provisions of the Excise Tax Act, which uses terminology from provincial private law, reflects the terminology used in both systems of private law in Canada, and in both official languages.
For example, the English expression “jointly and severally” no longer exists in Quebec civil law. It has been replaced by the term “solidarily”. One of the amendments ensures that the idea of “jointly and severally” appears in the English version of the legislation on the GST, and that the term “solidarily” is also used, so that the English version of the text reflects the term used in Quebec civil law.
That concludes the description of the measure in Part 2 of the bill.
The Chair: Thank you very much, Mr. Mercille. That was a very good presentation.
Senator Pratte: Mr. Mercille, is it a lot of fun for you to do things as complicated as that?
Mr. Mercille: The transactions are complex, and the legislation tries to reflect that, so that we get the best results.
Senator Pratte: On the matter of municipal public transit services, I seem to hear you saying that nothing will really change in practice. The Canada Revenue Agency is already interpreting the legislation in this way. But I am still trying to understand exactly what the issue is. Those services are already exempt from the tax. You are saying that the clarification is that it is the right that is exempt from the tax. The example we were given in the documentation is what happens when a public transit authority sells students in educational institutions the right to use public transit. That will also be exempt. I am not sure I understand the distinction. You were talking earlier about tickets and cards. Were they not already exempt from the tax anyway?
Mr. Mercille: The exemption applied because the Canada Revenue Agency was interpreting the provision. The intent of the policy was that the services would be exempt. It is a technical problem, and all the measures are technical in this part of the bill.
In terms of the GST legislation, a right is a good, while a service, by definition, is not a good. Someone could have interpreted it by saying that the exemption does not apply to the sale of a ticket because the ticket is not the service itself but the right to access to the service later.
Senator Pratte: Well, it is the goods and services tax.
Mr. Mercille: Yes, but the provisions of the law are specific, especially in terms of exemptions and reliefs, for example, as to whether the relief applies to a good or to a service.
Senator Pratte: In that case, we were talking about an exemption.
Mr. Mercille: But the word “service” was used.
Senator Pratte: The legislation is going to be clarified now and it will be clear.
Mr. Mercille: Yes.
Senator Andreychuk: I have a quick question. In one of your last statements you said that you were harmonizing the English with the French.
Mr. Mercille: Yes, so that both English and French means the same thing.
Senator Andreychuk: For many years we have been involved in the Senate Legal and Constitutional Committee on the harmonization policy. That it’s not a literal translation. Are these changes, then, vetted through Justice for the purpose of harmonization?
Mr. Mercille: Sometimes it is quite evident that the French and English say something different. Sometimes they are not big changes; they are minute changes.
To be more specific in terms of bijuralism amendments, when we make a change there is a group at the Department of Justice that has studied the differences in the federal legislation. The history behind it is that the legislation was drafted in English with a common law background and drafted in French with a civil law background. The law should be drafted in French and English versions to reflect both the civil law and the common law because there are francophones outside Quebec and there are anglophones inside Quebec.
Senator Andreychuk: We have a Canadian government policy on harmonization. It is administered through Justice, or at least it was; I haven’t followed it. Are the changes you’re amending in line with that?
Mr. Mercille: With their recommendations, yes.
The Chair: Honourable senators, before we adjourn the meeting, this will conclude Part 2 of what the officials have presented to us.
Tomorrow we will start with Part 3, and it will be in the same meeting room from 2:15 until 3:45 tomorrow afternoon.
With that, we thank you for all the clarifications you have provided to us. If we have other questions for you, we will put them in writing. On your end, if additional clarifications come to mind about the questions that you have been asked this evening, feel free to let us know about them.
Until tomorrow, dear colleagues.
(The committee adjourned.)