Proceedings of the Standing Senate Committee on
National Finance
Issue No. 69 - Evidence - June 5, 2018
OTTAWA, Tuesday, June 5, 2018
The Standing Senate Committee on National Finance, to which was referred the subject matter of all of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures, met this day at 9:02 a.m. to give consideration to the bill; and in camera, for consideration of a draft report.
Senator Percy Mockler (Chair) in the chair.
[Translation]
The Chair: I want to welcome everyone to this meeting of the Standing Senate Committee on National Finance.
[English]
My name is Percy Mockler, senator from New Brunswick and chair of the committee. I wish to welcome all of those who are with us in the room and viewers across the country who may be watching on television or online. As a reminder to those watching, the committee hearings are open to the public and also available online at sencanada.ca.
I would ask each senator to introduce themselves.
Senator Jaffer: Mobina Jaffer from British Columbia.
[Translation]
Senator Pratte: André Pratte from Quebec.
Senator Moncion: Lucie Moncion from Ontario.
[English]
Senator Mitchell: Grant Mitchell, Alberta.
Senator Deacon: Marty Deacon, Ontario.
[Translation]
Senator Dagenais: Jean-Guy Dagenais from Quebec.
[English]
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Seidman: Judith Seidman, Quebec.
Senator Day: Joseph Day, New Brunswick.
[Translation]
The Chair: I would also like recognize the clerk of the committee, Gaëtane Lemay, and our two analysts, Alex Smith and Sylvain Fleury, who team up to support the work of the committee.
[English]
This morning, honourable senators, viewers and Mr. Minister, we wrap up our hearings on the subject matter of Bill C-74, what we call a pre-study of the bill before it is received in the Senate from the House of Commons. This type of legislation is squarely in line with the National Finance Committee’s mandate, received by the Senate of Canada.
In the first hour this morning to discuss Bill C-74, the budget implementation act, 2018, No. 1, we welcome Bill Morneau, P.C., M.P., Minister of Finance, Department of Finance Canada. Thank you again for your availability, Mr. Minister. Every time we’ve asked to you come to our committee, you have always said “yes.”
Hon. Bill Morneau, P.C., M.P., Minister of Finance: I didn’t know there was an option.
The Chair: Honourable senators, this morning, the minister is accompanied by his official, Mr. Andrew Marsland, Senior Assistant Deputy Minister, Tax Policy Branch.
Minister, welcome, and welcome to your team of officials. I know a number of them are in the audience, ready to step in to answer questions from the senators, if need be.
After delivering your opening remarks, we will proceed to questions from the senators.
[Translation]
Thank you again, Mr. Morneau. Please go ahead.
[English]
Mr. Morneau: It’s a pleasure to be back before the committee to have the opportunity to talk about our budget implementation act.
As I said when I introduced this year’s budget in the house, with this budget we’re doubling down on our plan to invest in the middle class and in people working hard to join it. It’s a fiscally responsible plan that focuses on equality and growth, seeks to strengthen and grow the middle class, and takes steps to ensure more Canadians can contribute to Canada’s prosperity and to benefit from that success.
[Translation]
And we have indeed had success. Since November 2015, more than 600,000 jobs have been created in Canada, most of them full-time. The unemployment rate is the lowest in 40 years. Canada has been leading the G7 in economic growth since 2016. These are impressive figures. The Canadian economy is running very smoothly, but we know we can do better and we want to do better still.
[English]
Thanks to the strong record of economic growth, we have the opportunity and responsibility to invest in growth that works for everyone. That’s what we’re trying to do with this year’s budget.
The measures it contains reflect our government’s continued commitment to strengthening and growing the middle class, offering real help to people working hard and doing so in a fiscally responsible way.
I’d like to take a few minutes to describe some of the measures from Budget 2018 we feel will make a real difference in the lives of Canadians.
[Translation]
One of the key measures in Budget 2018 and Bill C-74 is the establishment of the Canada workers benefit. It is an improved version of the working income tax benefit. This benefit will put more money into the pockets of low-income earners.
[English]
A new benefit, the Canada Workers Benefit, or CWB, will allow low-income workers to take home more money while they work, encouraging more people to join and stay in the workforce. To give a sense of what this will mean for Canadians, a low-income worker earning $15,000 could receive nearly $500 more from the Canada Workers Benefit in 2018 than they would have under the old working income tax benefit.
[Translation]
Further, starting next year, the government will make the necessary changes to enable the Canada Revenue Agency to calculate the value of the benefit, even for workers who have not applied for it. Everyone who is entitled to the benefit will receive it when they submit their tax return. This measure is not part of the budget implementation bill, but I will be pleased to answer your questions about it.
[English]
Making this benefit more generous and automatically giving the benefit to those who qualify will help lift 70,000 more Canadians out of poverty by 2020. In total, our government will be investing almost $1 billion in new annual funding for the Canada Workers Benefit starting next year to help low-income workers get and stay ahead.
The Canada Workers Benefit isn’t part of the budget implementation act, but I’d be happy to answer questions on this.
Budget 2018 also strengthens the Canada Child Benefit. Thanks to the CCB, nine out of 10 Canadian families now have extra help every month to pay for things that are important for their family. Across Canada, nearly 6 million children benefit from this program. In dollar terms, families that receive the benefit will get, on average, about $6,800 this year. Since its introduction in 2016, the Canada Child Benefit has helped to lift about 300,000 Canadian children out of poverty.
The budget implementation act will build on these successes, strengthening the Canada Child Benefit by indexing benefits to the cost of living starting this July. I should note this is almost two years ahead of schedule, thanks to a growing economy and the improved fiscal position of the government.
[Translation]
With the indexing of the Canada child benefit, Canadian families will receive more than $5.5 billion by 2022-23. The Canada child benefit and the Canada workers benefit are two smart and responsible investments that will put more money in the pockets of those who need it most.
The budget implementation bill will also enable the government to keep promises it has made to Canadians, such as the legalization, regulation, and restricted access to cannabis to keep it away from young people and make sure criminals do not profit from its trade. Bill C-74 therefore establishes the federal framework for an excise tax on cannabis products. This framework will come into force once the retail sale of cannabis for non-medical purposes becomes legal later this year.
[English]
I understand the Parliamentary Secretary to the Minister of Justice and Attorney General and the Minister of Health have already spoken to you about measures in Bill C-74 related to the legalization of cannabis. I’m appreciative of all the work he has done on this file. I also want to acknowledge the work the Senate has done, especially regarding the importance of taking into account the concerns of Indigenous communities.
Our government will continue to work with our provincial, municipal and Indigenous partners to ensure we’re legalizing cannabis in a responsible and responsive way.
I’d also like to thank this committee for its work on tax planning using private corporations, a complex issue that benefited greatly from your study. As you may be aware, we received a lot of feedback on our proposals to address this issue and we listened. Proof of that is in Bill C-74, which includes simplified measures to limit income sprinkling by owners of private corporations. This approach ensures that family members who meaningfully contribute to the business are not affected by the changes.
It also limits the tax deferral opportunities related to passive investments held in a private corporation while allowing for a $50,000 threshold in passive income in a year.
This is equivalent to $1 million in savings based on a nominal 5 per cent rate of return. This gives business owners the flexibility they need to hold savings for multiple purposes.
[Translation]
The changes that have been made differ from what the government originally put forward. Thanks to your proposals and the suggestions from Canadians, we can move forward with these amendments while ensuring that the owners of private companies are able to put money aside for maternity leave or sick leave, retirement or other situations.
Finally, Mr. Chair, I would like to say a few words about our government’s commitment to providing more support to small companies that create jobs that Canadians depend on.
[English]
Small businesses create good jobs and help support communities and families right across the country. In fact, small businesses account for about seven out of 10 jobs in the private sector. We know that low and competitive tax rates allow Canada’s entrepreneurs to invest in their businesses and create better, well-paying jobs. That’s why we cut the small business tax rate to 10 per cent effective this past January with a plan to lower it to 9 per cent beginning next January.
By this time next year, the combined federal-provincial-territorial average income tax rate for small business will be 12.2 per cent, the lowest in the G7 countries and the third lowest among members of the OECD.
For the average small business, this will mean an extra $1,600 per year to reinvest in new jobs, products and equipment.
Mr. Chair, the measures that are part of the BIA reflect the government’s continued focus on putting people first, giving them the help they need now while making smart investments that will deliver growth for years to come. They reflect our government’s continued commitment to strengthening and growing the middle class and doing so in a fiscally responsible way.
With that, I’d be happy to answer questions.
The Chair: Thank you, minister.
Honourable senators, in order to give an equal and fair chance to all senators to ask questions, I would like to inform you that each senator will have five minutes. This includes your question and the answer from the minister.
Senator Marshall: Thank you, minister, for being here today. Could you give us an update on the Trans Mountain Pipeline and the arrangement with Kinder Morgan? It’s not in this year’s budget but I expect to see something further down the line.
I’m especially interested in the new pipeline, the one that has a current estimate of about $7 billion.
Mr. Morneau: I’d be delighted to. As you know, we federally approved the Trans Mountain Pipeline expansion and the B.C. government provincially approved it after a rigorous environmental assessment process and the implementation of our Oceans Protection Plan to make sure we were expanding the pipeline in an environmentally responsible way.
The decision to move forward on the pipeline expansion was based on a concern that the private sector was not able to deal with the political challenges between British Columbia and Alberta.
Senator Marshall: Is the decision made as to who is going to do the expansion? Will it be the it government, or is it going to be contracted out? What is going to happen? Right now my understanding is Kinder Morgan is doing something until there’s a final agreement with the government sometime in August.
What is happening right now with regard to the expansion?
Mr. Morneau: We’ve entered into a purchase and sale agreement.
Senator Marshall: There is an agreement?
Mr. Morneau: Yes.
Senator Marshall: Already?
Mr. Morneau: Yes, to purchase the assets of the Trans Mountain Pipeline and the Trans Mountain expansion. That agreement includes, obviously, terms and conditions we need to complete over the course of the next several months. The expected closing of that transaction would be somewhere around the end of summer.
In the interim, we also got to an agreement that guaranteed the work that was needed to move the project forward would commence immediately.
Senator Marshall: That’s the expansion?
Mr. Morneau: That’s the expansion work that’s proceeding this summer. That work is proceeding this summer.
We’ve already begun the restarting of that work to make sure it goes forward. That is guaranteed with a federal backstop in order to make sure that happens in the interim period during the closing of the sale.
Senator Marshall: That’s where the guarantee comes in. I’ve been reading there is a guarantee. It hasn’t been clear about what exactly the guarantee covers. It’s the guarantee to Kinder Morgan for what?
Mr. Morneau: During the time period in which we’re actually moving forward with the purchase and sale before closing, we want to ensure that the work was going. That meant we needed to ensure that work happened this summer. That’s why we moved forward in that fashion.
Senator Marshall: You have guaranteed it. At the end of the summer, will you reimburse Kinder Morgan?
Mr. Morneau: No. Part of the arrangement is that work goes forward. This is the way to make sure they could go forward in a way that confirmed we were taking responsibility for the project as we’ve already determined.
In terms of the long term for the project, our number one goal is to make sure the project gets completed. That is what we’ll always keep as first and foremost in our minds. We do intend on moving the pipeline and the expansion back into the private sector at an appropriate time.
Senator Marshall: Is there a current estimate on the expansion of the pipeline? The only number I’ve seen is $7 billion. I understand that figure is a little dated. Is there a current dollar estimate? And is there an estimated completion date for the expansion?
Mr. Morneau: During the course of the negotiations, of course, we did extensive due diligence on the project, on the existing pipeline as well as the expansion project. The number you quoted was the most recent number that’s been publicly declared by Kinder Morgan. There has been no update to that number that has been put out there.
We did due diligence, of course, against a range of outcomes. That is the most recent number.
Senator Marshall: As for an estimated completion date, is there anything on the timelines?
Mr. Morneau: Again, we looked at all of the project planning. I guess the fundamental way to think about that is you can’t complete a project if you don’t begin it, which comes back to our requirement we move forward on the project now.
That’s why getting back to work effective June 1 — the date we agreed on — was critically important to move the project forward. Of course, the reason the conclusion date was in question was because Kinder Morgan had stopped doing that work. By restarting that work, we create project certainty.
Senator Marshall: Okay. What’s the amount of the government guarantee? Is there a dollar value or is it open-ended?
Mr. Morneau: It’s against the construction for this construction season.
Senator Marshall: Whatever that is.
Mr. Morneau: The time period we’re talking about is, of course, from June 1 until the closing. I don’t have the exact number in my head. It’s a relatively modest amount.
Senator Marshall: Will we have to wait until next year’s public accounts to find out what the amount of the guarantee is, or is that something that will be publicly reported earlier than that?
Mr. Morneau: I’m not sure if it will be reported in that fashion. This is the ongoing work. I expect that what will happen — this is going to be a separate organization. It will be embedded in the profit and loss statement in that work because that will have been embedded in the work that was done during that time period.
The Chair: Thank you, senator. Your five minutes are over.
Senator Pratte: Regarding Bill C-74, minister, as you know, many Senate committees were involved in the pre-study of it. Several witnesses who appeared in front of the Banking Committee, which was also involved in the pre-study, expressed concerns regarding the sharing of information by banks with fintech companies.
In reality, the Personal Information Protection and Electronic Documents Act will apply, but many are still not reassured by this. I was wondering whether you were sensitive to these concerns, the problem of sharing of information by banks to fintech companies, and whether you intend to address these concerns in any manner. The Privacy Commissioner also expressed the same concerns.
Mr. Morneau: We always need to be sensitive to Canadians’ concerns about the privacy of their personal information. That will continue to be an important issue.
In seeking to allow the banking sector to have the possibility of doing more work with fintech organizations, we were, on the one hand, recognizing the critical importance of effective systems for the banking sector being innovative in terms of their development. It’s really recognizing the nature of how they develop those systems is changing and giving them the possibility of acquiring fintech companies.
There was nothing and is nothing in the proposals that in any way change the protection of data. There is no change in data protection incorporated into this. Canadians’ data protection remains equally stringent after the legislation as it was before. As you mention, it doesn’t change in any way the PIPEDA regulation around data security of Canadians’ information.
I appreciate the anxiety around data and recognize this is some place we need to continue to be vigilant. That has nothing to do with this particular measure and doesn’t in any way change that data security.
Senator Pratte: Another concern expressed regards sections 222 and 223, which make changes to the Currency Act and to the use that can be made of the funds in the Exchange Fund Account. In my understanding — and this is very technical, so my understanding is limited — the fund will become part of what is called the government’s prudential liquidity plan; for instance, if markets are disrupted, the government needs liquidity and cannot access the markets. The purpose of the amendment is so the government could get funding from this Exchange Fund Account. Some have expressed concern because what is written in the amendment is quite general and the government could maybe use that money for other current purposes, like to maybe balance its books.
Is there anything in either the act as it stands or the amendment that would prohibit such use of these funds?
Mr. Morneau: As this is quite a technical question, I am going to ask someone to focus on this question.
The Chair: Would you introduce yourself, please?
Leah Anderson, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: Certainly. I’m Leah Anderson. I’m the Assistant Deputy Minister of the Financial Sector Policy Branch at Department of Finance Canada.
The purpose of those amendments is just purely technical in the sense of providing greater clarity that they are not just solely for the purpose of facilitating intervention and exchange markets, in order to support the security of the exchange rate. That is one purpose of the Exchange Fund Account. It is also to manage the liquidity of the government’s balance sheet. To the extent we needed to borrow in an emergency situation — if there was a financial crisis, for example — it’s an opportunity to have additional funds in reserve for a rainy day, which is currently the case, but it’s just for further clarity.
The Chair: Thank you. Senator Pratte, we have to move on.
[Translation]
Senator Moncion: I would like to go back to Senator Pratte’s question about personal information.When a financial institution concludes an agreement with Equifax, for instance, who owns that information? That is one of the questions raised by the Privacy Commissioner.
Mr. Morneau: Do you mean currently?
Senator Moncion: Yes.
Mr. Morneau: The budget measures do not make any changes to the system as regards personal information. If there are questions about how it works at present, we can answer them.
Annette Ryan, Associate Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: The institution is responsible for protecting the information and this is governed by the agreements they sign with consumers. This type of contract governs the handling of information.
Senator Moncion: Thank you.
[English]
The Chair: Senator Moncion, just a second.
Would you please introduce yourselves?
Ms. Ryan: Absolutely. My name is Annette Ryan. I’m the Associate Assistant Deputy Minister for the Financial Sector Policy at Department of Finance Canada.
[Translation]
Senator Moncion: My question pertains to the new tax measures for persons aged 18 to 25. There is a lot of uncertainty about the income splitting rules. The rules are not clear. The CRA will no doubt play a very arbitrary role in applying these rules.
Do you have any interest in amending the rules to make them applicable after the age of 25?
Mr. Morneau: It is important to us to have rules that work well and that are well understood. Rules have to be implemented so a family can include children and the spouse in the business. The rules are very clear now. If someone works for the company for more than 20 hours per week, that person is considered to be truly involved in the company’s business. Income splitting is allowed in such cases. The same is true if a person invests money in the business. We chose the age of 25 so the rules would be well understood.
It is always possible to explain to CRA officials that income splitting is preferable in a specific situation. There are rules so people can be sure there are no problems. If the situation were different, they could contact CRA to see if income splitting would be allowed, based on their specific situation.
Senator Moncion: Have you considered indexing for passive income?
Mr. Morneau: We considered it necessary to have a rule that was easy to administer. So we chose the amount of about 1 million, which will decrease to 3 million. The numbers are clear and that is why we chose them.
The same is true of the other rules, such as the $10 million capital rule. The rules are clear, which makes it easier to manage a business.
Senator Moncion: So there is no indexing.
Mr. Morneau: No.
Senator Moncion: Thank you.
[English]
Senator Jaffer: Thank you, minister and Mr. Marsland, for being here. We appreciate you making yourselves available.
I have a general question on gender-based analysis. I know this is a big part of your work; you do gender-based analysis. My challenge is we don’t know what you’ve done; we just have to accept you are doing it, and, of course, we accept that. I was wondering if there were a way — in some countries, especially in Scandinavian countries, they make available forced gender-based analysis regarding the pilot, where it was applied and what difference it made. I’m interested not just in gender-based analysis but Gender-based Analysis Plus — for example, affecting LGBTQ2 communities, minorities and visible minorities.
Mr. Morneau: I just wanted to fully understand what we have published and what our intention is to publish. As you said, this is an important issue for our government. We want to ensure all the measures we take have an appropriate and positive impact on all parts of society. In particular, we want to think about how we can have a particularly appropriate way of increasing workforce participation among groups not as well represented in the workforce and improve outcomes for people who have had outcomes that are not as positive.
We start with women, because they’re half the population. We see we have lower workforce participation and outcomes in terms of equal pay for equal work, as an example.
We’ve worked hard to get better at this analysis. Starting in Budget 2016 and on, we’ve gotten better. We’ve gotten now to the stage where I think the capacity of our departments is vastly improved in terms of doing this analysis. We have disclosed some description of what we’ve been doing. We will be disclosing more next year. As we get better, we’ll be trying to disclose more.
You rightly acknowledged some other countries are disclosing more than we are. Of course, many countries aren’t doing this at all. One of the advantages some countries have is they’ve been doing it for longer, which means they have more expertise. We’re aspiring to be more and more transparent each year. As you say, it’s not only to focus on women but other communities not experiencing the same sort of economic success.
That is the goal. The transparency is really intended to increase each year as the ability to be effective increases. Certainly, my aspiration would be to be as transparent as possible to make sure people understand what we’re doing.
Senator Jaffer: Minister, I’m appreciative of what you’ve been doing. I’m not asking for a commitment now, because you will have to think about it. I will ask you to consider doing a post-report on how effective it was. I’m absolutely confidence you’re applying the policies, but we don’t know. It would be helpful if you do that.
My second question is on sprinkling. One of the things when our committee travelled and also otherwise hearing from people is that income sprinkling affects women. Did you do gender-based analysis on that? The biggest issue I hear is how do we — the 20 hours, the 25 hours — how do you keep a record? With the humblest way of saying it, you’re saying “as CRA.” I humbly ask you to try to phone CRA one day and see how long it takes to get through. I’m not being rude. It’s impossible.
Minister, I want to put this on record. I’m a farmer. I’m hearing from many farmers that it’s impossible to find out how many hours you put. The fear is three years from now, CRA will come and they’ll say, “You didn’t do this right.” There is no guidance of how we keep the hours. How do you keep it? This is a serious concern. I’d like you to either address it now or let us know later.
Mr. Morneau: Tax administration always requires putting in place rules that, hopefully, have the greatest amount of clarity possible. We’ve heard from groups across the country that the rules we put in place are vastly simpler. I appreciate that some people have some trepidation around any rule, but we think there is clarity around this for farming communities where people who are working 20 hours would be the equivalent of a vacation day. We see this as not a significant challenge. We will listen to those groups to make sure we are doing this in a way that effectively considers their concerns.
Senator Jaffer: Thank you, minister.
Senator Seidman: Thank you very much, minister, for being here today.
We’ve heard concerns that the new tax on medical cannabis is unfair to vulnerable Canadians who rely on this therapy to manage pain and other chronic conditions. This bill adds another dollar a gram in excise tax, which many patients say they can’t afford to pay, while other drugs are tax-free. This adds another 10 per cent on top of what sick people already pay. Why are you introducing a new tax on Canadian patients?
Mr. Morneau: We’ve heard this concern. There are a number of ways we’ve addressed this. There are two straightforward ones: Low-THC marijuana is not in the category of attracting the tax; and second, if marijuana gets a drug identification number and is clearly shown to be medically necessary, then we will have it exempted. To the extent that happens — and I know people are working in that regard — that will attract the exemption.
Then we also have a tax credit, which I’ll ask Andrew to describe, around medical taxes.
Andrew Marsland, Senior Assistant Deputy Minister, Tax Policy Branch, Department of Finance Canada: Themedical expense tax credit applies for people who have extraordinary drug costs over a certain dollar limit or 3 per cent of taxable income. The credit applies at 15 per cent and an equivalent credit is available at the provincial level to help offset the cost of prescription drugs. Medical cannabis also qualifies for that tax credit.
Senator Seidman: Minister, if I might just go back to the two points you made about the attempt to get a DIN number, I’m wondering where is that in the process? We have heard it’s a fairly complicated process.
Mr. Marsland: There is currently one cannabis-derived prescription drug that has a drug identification number. I believe there are several in the process but I’m not sure how many. Of course, the process is a rigorous one. The government has committed to look at ways to accelerate the approval process while maintaining the rigour of the testing. That’s my information.
Senator Seidman: These are all very complex pieces in place here. However, I still go back to the original question and say there are checks and balances the existing system has in place. We’ve heard there may be complications in that people wanting to use recreational marijuana will use medicinal marijuana. However, the checks and balances ensure, for example, that doctors write a prescription similar to they would for other prescription drugs. What is wrong with taking that approach?
Mr. Morneau: I appreciate that people have different points of view. The prescriptions are written for medically necessary drugs with drug identification numbers. That’s how we come to the conclusion that having a drug identification number would be the appropriate way for us to create the exemption that is required.
Obviously, we’re trying to create integrity around the taxation system to make sure we ensure that people who are using something for recreational purposes are differentiated from people who are using it for medical purposes. If, in fact, it is for medical purposes, then presumably it has the capacity to get a drug identification number.
I recognize as we implement a new system there will be changes that will present challenges to certain individuals. We’re trying to come up with an approach that both recognizes their current situation but also recognizes the new reality that marijuana will be available legally and a source of supply for people.
Senator Mitchell: Thank you, minister. You may be aware there has been some discussion on the Senate side in the Agriculture Committee about the application of exemptions for the agricultural sector on the carbon price. I know there are a number of reasons that would explain that and I’m quite happy with them. One is that with the B.C. model, there hasn’t been a problem there. Another is that there will be money to reimburse agricultural farmers if the provincial or federal jurisdiction chooses. Third, there are relatively few jurisdictions in this country where this regime will apply because most provincial and territorial regimes are already doing it, and there are other explanations.
Could you give us your explanation for why it is the price has been exempted for certain fuels but not for other fuel use in the agricultural industry?
Mr. Morneau: First and foremost, we recognize that our goal in putting forth the approach of a federal backstop on carbon pricing is to encourage the provinces to take up the responsibility for setting in place an approach to carbon pricing. I think the first way to address this is one of the things you mentioned, and that’s the significant majority of Canadians are in jurisdictions in which there is a carbon price approach. You’re from Alberta. As you know, there is an approach in Alberta. There is one in B.C., one in Ontario and one in Quebec. It captures the large majority of Canadians.
The federal backstop is just intended for those jurisdictions that don’t put in place a regime. Clearly, in some places that might be the long-term approach because of efficiency. In the Northern territories, I’ve heard from at least one territory that might, over the long term, choose to have the federal backstop put in place.
Importantly, we don’t believe it’s our responsibility to deal with every part of the implications of this. That’s why we are putting the revenue back to the provinces and territories. The decision about how to administer the revenue that comes from this, if you want to call it that, is a provincial or territorial one.
We have taken the broad-based approach that we think the core elements of the farming and fishing areas are exempt, because we think that’s consistent with the approaches that provinces will want to take. If a province decides to give a further rebate to farmers, that’s going to be their decision. They’re going to have the revenue. We actually won’t have the revenue. We’re going to pass the revenue back to the provinces and territories.
I hope that appropriate discussion happens at the provincial or territorial level.
Senator Mitchell: Of course, much discussion has been around the effect of this price on the economy. The government’s assessment is that by 2022, there will be a $2 billion differential in what GDP growth might have been, which is nothing on $2 trillion. Not much consideration has been given, at least that I’ve seen, to the actual stimulative effect of what this will do to peoples’ view of how they run their businesses, approach these pressures and stimulate even greater growth in a 21st-century economy we need to be stimulating.
I know it’s difficult for you to speculate. You don’t want to do that, but is thought given to how much extra stimulation the economy might get if you really consider what businesses and individuals are going to do with their creativity, innovation and technology?
Mr. Morneau: I think there are two ways we can do modelling. One is at a micro level on an industry-by-industry basis. The second is at a broader economic level based on what we think growth will be overall. There have been many studies on an industry basis about what incentives toward the development of a clean technology sector can do. We’ve certainly paid attention to those assessments.
At a broader economic level, by definition we’re getting broad assessments of what economic growth is going to be. That’s how we form and do our budget based on those assessments of growth levels.
I think the second issue, though, is not only around the advantages at the sector level, but it’s the challenges that we will face if we don’t do this. It’s the significant risks to our long-term economic health through climate change. It’s the risks to our economy, or even to our fiscal situation, based on dealing with climate events which, as we know, have been pretty numerous.
There are potential rewards and potential risks if we don’t do this. We’re of the view we don’t want to pass the escalation of those risks to the next generation without taking a responsible approach to trying to manage our impact.
The Chair: Senators, we had agreed with the minister that we had one hour. I have 10 minutes left for four senators’ questions.
Please go directly to your question.
Senator Andreychuk: Minister, the chair seems to stop at me all the time with that admonition. I would love to talk about Saskatchewan and alternate ways to go about climate change reduction, but I’m going to leave that one.
I want to go back to Kinder Morgan. I’m a bit confused. I got the purchase price for the existing assets basically — is what I call it. You now say you’ve got a contract in place until you determine whether you’re going to sell the assets to another company; is that it? Is it a contract with Kinder Morgan to build the pipeline? You said you wanted to start immediately.
Is there some contract that says they’re building it, how they’re going to build it, at what price and is that part of where the bonuses came in for the two executive officers? Is that all one package and agreement? Will we see that? At what point? Is it an open-ended agreement?
Mr. Morneau: For this project, we’ve purchased the current pipeline, and we’ve purchased the investments made in the Trans Mountain Expansion Project. In making that arrangement, as happens with any purchase of these sorts of assets, there’s a time period between the actual completion of the contract, which we did last week, and the closing of the arrangement. There are approvals required and processes to go through. We need to work through those. The seller, Kinder Morgan, has to go through a shareholder vote. They need to develop a proxy that needs to go out to their shareholders. That vote needs to happen.
That time period takes a different amount of time in different transactions. In this transaction, we’re thinking it’s roughly a three-month time period. I don’t have an exact date for you.
That is our intent. We are purchasing those assets. We will be putting those assets into an enterprise. We’ll be keeping it to be run in a similar fashion to how it’s currently run. We expect that over time, we will move that asset back out into the private sector. That’s the approach we’re taking.
We believe it’s important the work starts this season so the pipeline can be built. In order to do that, since we don’t own the asset now, because we’ve entered into the agreement but we don’t close yet, a critical part of the arrangement from our standpoint was the work had to be going on this season.
There is no reason for the seller to be doing that, because they’re selling the assets. We said, “No, we want you to do that.” That’s why we provided a guarantee for them that they would not have any cost implications as a result of doing that. That was a part of the assets we’re buying.
That is the approach we’re taking.
Senator Andreychuk: I want to get at the cost and timing. We know what the assets were purchased for and the work to completion. We know there is an interim period where Kinder Morgan will continue. I’d like to know where those costs to them are being taken up with the government.
Then you’re going to set up an enterprise. If you don’t sell, it would be important for us to know what that cost is under the rubric of the enterprise, should it be sold. Part of that is we need to know the costs. The second is the quality of what work may or may not be done, whether it is cost efficient, and safe and secure in terms of safety standards.
Having been involved a long time in pipelines, it’s not only whether you can do it, but whether you can do it safely and efficiently. Will we be able to get from you the costs at some point?
Mr. Morneau: Our intent is to continue running the project in the same fashion that it’s been run. The project managers who were engaged in doing this work are part of the transaction. The high standards that have been going on during the course of this work, all of the rigour, the meeting up to the 157 conditions set out through the environmental assessment process — all of this work will continue to be done through the course of the approach we’re taking.
In terms of the overall opportunity, it is about creating the ability to expand the pipeline, which is an investment that produces returns. By creating certainty of completion, we’re increasing the value of the assets. As I mentioned, we did extensive due diligence and have a high level of confidence the approach we’ve taken not only recognizes the current value in those assets but creates value from the new assets.
The Chair: Thank you, minister.
Senator Andreychuk: It wasn’t answered, and it’s the liability question that I want. Who bears the risk?
The Chair: Thank you. Minister, if you want to add additional information on that question, please have your officials go through the clerk.
Senator Deacon: Thank you for being here. We encourage innovation and new thinking as it relates to economic growth in business in Canada. We have heard from a variety of witnesses over the last few weeks with specific reference to Bill C-74. Some of the most compelling witnesses have been representing small businesses or national organizations that represent small businesses. There is a sense of concern and urgency. We’ve seen many bar charts, spreadsheets and infographics such that the messaging to us is that some of these businesses — pretty essential that may not be filled — have to take a look at either selling themselves or organizations to a larger national conglomerate or moving. There were several witnesses who talked about maybe having to move to the States, and they clearly outlined some of the advantages they perceived in the States — or shutting down. It could be a farming business that won’t be replaced and picked up.
There is always fear with change. I’m just wondering if you can comment on those candid concerns expressed by that sector.
Mr. Morneau: It’s always important to listen to people’s concerns. The facts are important, though. The fact we have the lowest small business tax rate among G7 countries should not be lost on people. The fact that our small business tax rate is lower than the U.S. small business tax rate and makes the argument that a small business is going to move to the States based on the small business tax rate hard to understand.
People can say things. I guess the question is whether those things have any validity.
That is the situation we find ourselves in. We’ve tried to make sure we create the ability for a business to appropriately reinvest with the small business tax rate — and that’s what they’re going to be able to do — but not to have an excessively large amount of capacity to save for the future versus what they would be able to have if they weren’t in the small business or weren’t privately incorporated.
Our rules around small business tax rates are that, once a business gets to a certain size, they instead move to the large business tax rate. We’re also competitive, which I think is important to point out, in our large business tax rate. Our average small business tax rate, as I mentioned in my remarks, is 12.2 per cent. Our average large business tax rate is around 27 per cent.
As a business hits a threshold in terms of their annual profits — more than $500,000 in annual profits — they move into a large business tax rate. If they move beyond $10 million in capital, they become qualified as a large business. What we’re saying now is once they get past a certain amount of passive investment income — $150,000 of passive investment income — they’re fully in the large business tax rate.
It starts at $50,000 and goes to $150,000, meaning that at approximately $3 million of passive investment income, they’re fully in the large business tax rate.
There will be people who will not like any form of taxation. I understand that. We think this allows us to generate the kind of activity we want to generate, which is investment in small businesses. This is particularly important as we go through an automation phase in the economy and more people might consider small business as an appropriate way to find great job opportunities. We’ve done that in a way we think is balanced.
The Chair: Senator, we have to move on.
[Translation]
Senator Dagenais: Since we have to be brief, Mr. Morneau, I will be brief. I usually serve on the Agriculture and Forestry Committee, and a lot of producers say that the carbon tax cuts into their profit margin and makes them less competitive with their U.S. neighbours along the border, for instance. You said that some groups will be exempt from the carbon tax. Is that deliberate or accidental? Will your government try to change that over time?
Mr. Morneau: I believe you are from Quebec?
Senator Dagenais: Yes, I am.
Mr. Morneau: So there is no change for people in Quebec. Our approach is to find a solution for the provinces and territories that choose to benefit from the federal backstop. I am referring only to the provinces or territories in that situation. That is not the case for Quebec. We decided there would be an exemption for farmers. So that is our starting point.
I know there are some important details, but if there is a specific situation in a province that chooses the federal backstop, the provinces themselves could offer their farmers and producers a discount. I think we have found a solution that works for the vast majority of people under the provincial approach. Finally, if there is something important for the other provinces, they can find their own solution to their situation.
Senator Dagenais: Thank you, Mr. Morneau.
[English]
The Chair: The last question, short and precise, goes to Senator Griffin.
Senator Griffin: I’ve been read my orders. I’ll tell you where I’m coming from. I’m chair of the Agriculture and Forestry Committee. Senator Mitchell and Senator Dagenais already brought up a couple of good points. The exemption of heating and cooling fuel costs is very important to farmers. They’ve told us that over and over again in the committee. They’ve also suggested specifically including propane and natural gas under the definition of a “qualifying farm fuel.” This is not an amendment, but they’ve requested there be a clear definition of farming so it’s consistent with the Income Tax Act and the Canada Revenue Agency’s ordinary definition of “farming activities.” People don’t see themselves in here, such as maple syrup farmers, Christmas tree farmers, et cetera. I’m encouraging you to do that.
My big point right now is that I’m disappointed — the question is coming — and I’ll tell you why. It appears you’re pushing this off onto the provinces and there’s very little importance given in this Parliament to agricultural issues. There are one or two of us in the Senate that come from a farm background and almost no one lives on a farm now.
If the Senate were to bring forth the amendments regarding the fuels, would you seriously consider them in the House of Commons?
Mr. Morneau: If I could start with a couple of things you said. The Christmas tree farmers and the maple syrup farmers are included.
Second, the definition of “farmer” under the CRA versus what we’re talking about is consistent. We’ve gone back to make sure that’s the case. There is no difference between those definitions.
Third, we have put in place an exemption for farmers. We will always seek to find a way to make sure we work appropriately with provinces. In a federal-provincial framework, we have to figure out how to best consider where the appropriate responsibilities are.
We’ve given a broad-based exemption, but then we want to make sure that provinces have the individual discretion to manage this in a way that makes most sense for the provincial situation. Even in the farming sector, different provinces are different. By returning the revenue to provinces that choose to use a federal backstop, we allow the province to deal with their particular situation that is potentially unique.
We think this creates the right balance for us in terms of having an overall approach that makes sense, providing a broad-based exemption for farmers and fishers, but recognizing the specific situation may be different in each case. We do not have any revenue as a result of this tax. This will be revenue at the provincial level that will be returned. They will be able to determine in their judgment what’s appropriate for their province.
The Chair: Honourable senators, with the indulgence of the chair, I have to share with you the minister has given us more time than he had made available.
On this, honourable minister, thank you very much on behalf of the senators for your time. If you feel you want to add any additional information, please do not hesitate.
Mr. Morneau: I also have a parliamentary responsibility. I’m on house duty today.
The Chair: Absolutely. On this, minister, thank you very much. Senators, we suspend to move into an in camera meeting.
(The committee continued in camera.)