Proceedings of the Standing Senate Committee on
National Finance
Issue No. 81 - Evidence - November 27, 2018 (morning meeting)
OTTAWA, Tuesday, November 27, 2018
The Standing Senate Committee on National Finance met this day at 9:32 a.m. to study the subject matter of all of Bill C-86, A second Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: I am Percy Mockler, senator from New Brunswick and chair of the committee.
I welcome all of those who are with us in the room and viewers across the country who may be watching on television or online.
[Translation]
As a reminder to those watching, the committee hearings are open to the public and are available online at sencanada.ca.
[English]
At this time, I would like to ask the senators to introduce themselves.
[Translation]
Senator Forest: Good morning. Éric Forest from the Gulf region of Quebec.
Senator Pratte: André Pratte from Quebec.
Senator Moncion: Lucie Moncion from Ontario.
Senator Forest-Niesing: Josée Forest-Niesing from Ontario.
[English]
Senator M. Deacon: Marty Deacon, Ontario.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Eaton: Nicky Eaton, Ontario.
Senator Neufeld: Richard Neufeld, British Columbia.
[Translation]
The Chair: I would now like to introduce the clerk of the committee, Gaëtane Lemay, and our two analysts, Alex Smith and Shaowei Pu, who team up to support the work of the Standing Senate Committee on National Finance.
[English]
Honourable senators and members of the viewing public, the mandate of this committee is to examine matters relating to federal estimates generally, as well as to government finance.
Today, we begin our consideration of the subject matter of Bill C-86, which was referred to us by the Senate of Canada on November 7.
Bill C-86, A second Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018, and other measures is what we call a budget implementation act.
[Translation]
The study of this type of legislation is squarely in line with the Senate Committee on National Finance’s mandate.
[English]
To begin our examination of the entire bill, we have before us a number of officials from the Department of Finance. I would like to say to Mr. McGowan and Mr. Leblanc, welcome to all of you and your team. I know a number of your colleagues are on standby, either in the audience or in an adjacent room, ready to step in if there is a need. Thank you for being with us today.
We are expecting you now to go over the measures in the bill and to explain them as clearly as possible so that we understand what you are asking the Finance Committee to take a vote on.
If it is all right with you, we would like the opportunity to ask questions as they pertain to each measure, after it is explained, to make sure that we have full understanding before we move on to the next measure.
That being all right with Mr. McGowan and Mr. Leblanc, please walk us through your measures. The floor is yours, Mr. McGowan.
Trevor McGowan, Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: As was stated, I am going through each of the measures in the bill, in the order in which they first appear in the bill. Because the Income Tax Act is a complicated statute, one measure might be contained in several different clauses based upon the section of the Income Tax Act that it amends, so for each measure I am also tell you which clauses of the bill the measure relates to.
The first measure relates to foreign divisive reorganizations. It provides the appropriate tax consequences when a Canadian shareholder of a foreign corporation receives shares of another corporation on the division of the foreign corporation.
Absent this provision, it will be fully taxable as ordinary income as for the Canadian investor. This provides that there would be a deemed dividend on receipt of the shares in one of the division transactions.
It can be found in clauses 2 and 39 of the bill.
I am happy to answer questions on a measure-by-measure basis. When I finish each measure, I will give the references so that the committee knows when I am done.
The Chair: There is a consensus, so this is the approach we will undertake.
Senator Marshall: What companies would this apply to? Are these publicly traded or small business, or could they be any type of corporation?
Mr. McGowan: They would be foreign corporations. I don’t think there is a requirement that they be publicly traded.
The transaction that was brought to the attention of the Department of Finance was the splitting up of a division of a large Mexican company. It was a transaction under Mexican law.
Senator Marshall: This would not apply to a lot of corporations like the small business changes, would it? It would be a small number of businesses.
Mr. McGowan: That’s absolutely correct.
Senator Marshall: Why is it retroactive to 2012?
Mr. McGowan: That was the date on which taxpayers brought the issue to the attention of the Department of Finance.
Senator Marshall: The extra revenues that will be raised as a result of that transaction, do they show up anywhere in the schedule?
Mr. McGowan: No, this does not have any particular revenues associated with it. It would in fact be a relieving measure. For many taxpayers a receipt of a deemed dividend under this measure would not be taxable.
Senator Marshall: Thank you.
[Translation]
Senator Forest: I have a technical question. To ensure that we’re on the same page, are you referring to the bill itself or to the guide? Which document are you referring to?
The Chair: The procedure that seems to be the quickest —
Senator Forest: With the bill?
The Chair: With the bill.
[English]
If there are no other questions on the matter of foreign divisive reorganization, we will then move on to cross-border surplus stripping using partnership and trust.
Mr. McGowan: This measure modifies an existing regime in the Income Tax Act designed to prevent the extraction of retained earnings from a Canadian corporation to a foreign parent corporation. These are called cross-border anti-surplus stripping rules. Surplus stripping simply refers to the extraction of corporate profits otherwise than by way of dividend.
These rules currently apply relatively clearly in the case of corporations. However, there is not currently an explicit and comprehensive regime dealing with cross-border structures that involve partnerships and trusts, that is to say where there are entities in partnerships and trusts between the foreign parent corporation and the Canadian corporation.
These rules essentially provide that the rules look through the partnerships and corporations to arrive at the appropriate tax results where the anti-surplus stripping rules apply to a corporation. They provide a comprehensive set of rules dealing with partnerships and trusts in the anti-surplus stripping regime.
It can be found in clauses 3, 4, 5, 14 and 21 of the bill.
The Chair: There no further questions on the particular measure, we will move to the next measure, which is eligibility for the Canada Child Benefit under kinship programs.
Mr. McGowan: The Canada Child Benefit is an important program introduced by the government. It provides benefits to families.
This measure ensures that the receipt of amounts under a provincial kinship program will not by itself disqualify a recipient, otherwise eligible for the Canada Child Benefit, from receiving the Canada Child Benefit.
In short, it responds to a concern raised that receipt of such amounts under a kinship program run by one of the provinces would cause the relative child to be considered not wholly dependent upon the adult caregiver. Thus the child could cease to qualify as a child of the adult for the purposes of the Canada Child Benefit, which could cause the parent to cease to be eligible.
That is an inappropriate tax consequence. This amendment ensures that those who ought to be able to receive the Canada Child Benefit can continue to receive the Canada Child Benefit, even in situations where a kinship amount has been received.
It answers a potential question in the application of the child benefit and ensures that it applies appropriately.
It can be found in clauses 12 and 35 to 38 of the bill.
Senator Eaton: Did you have to get agreement from the provinces for this? It is an excellent idea, but did you have to get agreement from the provinces?
Pierre Leblanc, Director General, Personal Income Tax Division, Tax Policy Branch, Department of Finance Canada: In this case it is not so much a question of agreement but a case where the province was bringing in the program and notified us about their intentions.
Then, basically, it made us look at the rules to make sure that it would provide, as Mr. McGowan described, for these children continuing to be eligible for the Canada Child Benefit. It turned out that it requires a modest legislative change to continue to ensure that.
Senator Eaton: It is a good thing. If the children’s parents are unable to look after them and they move in with uncles, aunts or grandparents, they will receive the child benefit cheque.
Mr. Leblanc: In these cases it is for the security of the child that these arrangements are made.
[Translation]
The Chair: Are there any other questions regarding the section entitled “eligibility for the Canada Child Benefit under kinship programs”? If not, we’ll move on to the measure entitled “controlled foreign affiliate status.”
[English]
Mr. McGowan: There are two related measures here dealing with foreign affiliates, so I will provide some introductory comments on Canada’s foreign affiliate system as it relates to both measures.
Canada has a set of rules in the Income Tax Act relating to passive income earned by controlled foreign affiliates. Those are foreign corporations controlled by the Canadian investor or the Canadian investor together with four other Canadians.
They ensure that certain passive income earned in the controlled foreign affiliate is taxable in Canada on a current or accrual basis. That prevents taxpayers from shifting passive investments to their controlled foreign affiliates, often in a lower tax jurisdiction, and earning passive incomes from bonds and things like that on the investment portfolio and having them taxed at the lower often offshore rates.
The foreign accrual property income or FAPI rules ensure that Canadian investors with Canadian taxpayers are taxable on an accrual or current basis.
Two planning techniques evolved to avoid the application of these rules. Both use so-called tracking shares. The first relates to artificially meeting an exception from the foreign accrual property income rules that apply when your foreign affiliate has more than five full-time employees engaged in the active business of managing the investments.
This exception is provided in general terms to ensure real active business is being carried on in the controlled foreign affiliate where there are more than five people working on managing the portfolio. It’s more of an active business and not simply a passive investment portfolio that has been transferred to a foreign affiliate. Where there is a sufficient number of people involved in managing the portfolio, an exception is provided. This measure responds to the use of tracking shares to artificially meet this more than five-employee test.
Tracking shares are shares of a corporation where the economic return on the shares are determined by reference to property contributed by the investor. This might work in practice when each of three Canadian investors has sufficient offshore investment activity to support two investment managers. Two would not be enough to meet the five-employee test. Each would contribute their portfolios to their controlled foreign affiliate. The terms of the shares they would take back would ensure their economic return is determined solely by reference to the portfolio they contributed.
Each of three people who have two offshore investment advisers would now have six. According to the planning, they would meet the more than five employees test and qualify for an exemption from foreign accrual property income.
This planning technique can be challenged by the Canada Revenue Agency, including through the application of the general anti-avoidance rule; but this measure would provide certainty for taxpayers and clearly close the planning opportunity such that each Canadian taxpayer or each tracking class of shares is considered to be its own foreign affiliate. If there are more than five full-time employees associated with that tracking class, an exception will be provided. Where these tracking shares are somewhat artificially combined interests in a corporation, this would split them up and apply the test appropriately in respect of each class.
This measure can be found in clauses 6 and 7 of the bill.
Senator M. Deacon: Could you share if this is a common practice by many, or is it seen as a new way of doing business or a tightening up of an existing practice?
Mr. McGowan: It is an existing planning technique that has been newly developed. I don’t know that it can properly be described as terribly common, but it is something that has been identified by the Canada Revenue Agency. It is out there; it is not a theoretical planning rule.
Exceptions are provided where you have real investments in a foreign passive investment portfolios. As I said, if you really have five offshore managers in respect of your class, the rules could apply appropriately and provide an exclusion there.
It is a recently developed planning technique. It is fairly recent and I don’t think it is vanilla tax planning.
Senator Marshall: I realize this is a technical amendment, but none of that income was taxed in Canada previously. That’s what I am taking from what you are saying.
Mr. McGowan: The objective of the planning is to avoid accrual taxation. The goal of the planning would be that it is not taxable in Canada.
Senator Marshall: But it will be now.
Mr. McGowan: Going forward, yes.
Senator Marshall: I would think most would be with the U.S. Would taxes be paid on the U.S. side? Will there now be duplicate taxation?
Mr. McGowan: Our tax rules provide a mechanism for essentially giving a tax credit in respect to foreign taxes paid. It is called foreign accrual tax. To the extent that taxes are paid in a foreign jurisdiction, it’s generally recognized and taken into account.
Senator Marshall: Do the extra revenues the government will raise from this measure show up in our schedule, in our annex, in our supplementary information, or are they not material enough to be included?
Mr. McGowan: It is in the tax measures supplementary information that accompanied the budget.
Senator Marshall: There is nothing showing up there.
Mr. McGowan: Right.
Senator Marshall: So it’s not material.
Mr. Leblanc: The revenue impact of these measures is in the tax measures supplementary information booklet published alongside the 2018 Budget.
In this case, as Mr. McGowan was explaining to Senator Marty Deacon, it is not a technique that is all that widespread. It has the potential, if no action is taken, to become more widespread. It is protecting the tax base we have now.
Senator Marshall: Preventative.
Mr. Leblanc: Yes.
Senator Andreychuk: Following up on what Senator Marshall has asked, it is a preventative move. I understand CRA alerted the finance department of the technical problem that could exist.
We are talking about investment into Canada. Will this be a disincentive? If it hasn’t been a problem you’re anticipating a problem, but I see the other downside that you might not then invest.
Mr. McGowan: I should clarify. This does not relate to investment into Canada but the transfer of investment out of Canada.
Senator Andreychuk: It will not affect any incentives to come into Canada.
Mr. McGowan: That is right. It applies where a Canadian taxpayer owns shares of a foreign corporation, not where a foreign company invests into Canada. It is aimed at Canadian taxpayers shifting passive investment portfolios out of Canada and earning the return there rather than foreign investors coming into Canada. It should not have any impact on foreign direct investment into Canada.
Senator Andreychuk: Are you targeting tax opportunities or avoidance?
Mr. McGowan: It is a tax planning technique. As I said, it had been identified by the Canada Revenue Agency as something that a limited number of taxpayers were engaging in.
I would not want to suggest it is tax evasion or anything like that. It is tax planning, relying on the law as it stands. It is currently being challenged by the Canada Revenue Agency, but these rules provide a certain tax regime or provide certainty in the tax regime to address this type of arrangement.
The Chair: Are there any other questions?
[Translation]
Senator Forest: Given this tax planning for passive capital investments and all our discussions on the issue of removing certain items that may be considered working capital or reserve capital in order to re-equip production lines, do the same rules apply with respect to passive capital investments abroad?
Mr. McGowan: Thank you for your question. Unfortunately, given the many technical terms in my answer, I’ll need to respond in English.
[English]
If I understand, the question is related to the taxation of passive investments and how it relates to recent measures relating to the taxation of passive investments in Canada.
This is independent of those. This is an international tax measure. We have a long-standing set of rules in the Income Tax Act relating to foreign accrual property income and the attribution back to Canada of that type of passive income. This responds to recently uncovered planning in the international tax area. It is separate from the recent private corporation amendments, although, as you alluded, they both deal with the taxation of passive investment in Canada.
[Translation]
Senator Forest: For the purposes of this tax planning, which involves investing passive capital abroad, what’s the general profile of the companies? Are they large companies with a minimum of six individuals who could focus on the tax planning? In general, are the target clients more likely to be large companies that operate internationally?
[English]
Mr. McGowan: I think this type of tax planning is available for high net worth individuals in Canada and for private corporations in Canada with surplus investment portfolios. I do not want to suggest that it is just for large multinational corporations when in fact a lot more tax planning techniques are available to large multinational corporations that are probably more commonly used than this type of tax plan.
I am not aware of it being widely used in the international context where things like transfer pricing and different foreign affiliate tax planning is more readily available in that context. It is not exclusively for large corporations.
The Chair: As there are no other questions, we will move to a measure entitled “foreign affiliates investment businesses.”
Mr. McGowan: This is a companion measure. The previous one related to the avoidance of investment business status by artificially meeting the more than five employees test.
The other planning technique, again using these tracking shares or tracking interests, relates to the avoidance of controlled foreign affiliate status through the use of planning shares.
As I said earlier, these foreign accrual property income rules that attribute back certain types of passive income earned in a controlled foreign affiliate only apply in the context of controlled foreign affiliates. That is essentially where a Canadian or a small group of Canadians controls the foreign affiliate.
This planning technique involves the use of tracking shares. A Canadian with a portfolio of investments or money to invest could along with a number of other Canadians each invest in a foreign affiliate, ensuring that none of them meets the legal test for controlling the foreign affiliate. It would not be a controlled foreign affiliate in respect of any particular Canadian investor.
For each Canadian investor, their return would only be determined by reference to their tracking interest. Economically, it would be largely tantamount to a direct investment in their own controlled foreign affiliate because their economic return is only determined by reference to what their class points at, like the investment portfolio of the controlled foreign affiliate their class relates to.
Because there are a number of tracking classes, each one takes the filing position that they don’t control the foreign affiliate and the controlled foreign affiliate rules don’t apply.
This measure, as with the previous one, essentially splits up the controlled foreign affiliate based upon the different tracking classes of shares and treats them as separate foreign affiliates. The general rules apply normally in that case. It prevents the avoidance of controlled foreign affiliate status through the use of tracking shares.
As they relate to the same provisions of the act, these can be found in clauses 6 and 7 of the bill.
The Chair: As there are no further questions on that measure, we will then move to the next one entitled “trading or dealing in indebtedness rules.”
Mr. McGowan: They all relate to the same provision of the Income Tax Act, so they are all in the same amending clause. This will be in clause 7 of the bill as well.
This relates to the trading or dealing in indebtedness rules. Recent amendments to the Income Tax Act enacted a couple of years ago modified the rules relating to when a taxpayer could qualify for the trading or dealing in indebtedness. They were related to offshore financial institutions and were amended to address planning that involved the establishment of a foreign corporation qualified under local law as a bank, essentially, despite it not really having any banking business. This was in a previous bill. It modernized the rules relating to when the exception respecting foreign investment businesses is met, so it changed the investment business rules.
This measure amends the trading or dealing in indebtedness rules in the foreign affiliate system, which do largely the same thing, to bring them up to the standard introduced in the previous bill and to ensure consistency within the foreign affiliate rules.
It identified an inconsistency between two sets of rules in the Income Tax Act that essentially do the same thing. It brings the rules relating to trading or dealing in indebtedness into line with the more recent rules introduced a few years ago. It is a largely technical change, just aligning the language.
As I mentioned, it is in clause 7 of the bill.
Senator Andreychuk: On this one and the last two, you are aligning within our system. Are these types of rules in other countries, for example, the U.S. et cetera? Are we following or creating something unique for Canada?
Mr. McGowan: The details are uniquely Canadian in our tax system and have served us well. Our broad approach to taxing foreign affiliates is in line with the international standard employed by many, if not most, developing nations.
The recent tax reform in the United States actually brought their tax system more into line with Canada’s and the international norm. Canada’s tax system is not out of line. In fact, we have recently seen the United States moving more toward this type of system internationally.
The Chair: As there are no other questions, we will then move to the measure entitled “tax relief for Canadian Armed Forces personnel and police officers on international police operations.”
Mr. McGowan, the floor is yours.
Mr. McGowan: This measure follows up on recent amendments to the Income Tax Act that enhanced and extended the tax exemption available in respect of Canadian Forces personnel deployed on certain designated international missions.
It extends it so that police officers on certain international missions designated by their minister would be entitled to the same tax exemption that currently exists for Canadian Forces personnel and international missions designated by the Minister of National Defence. It extends a current exemption in respect of police officers serving abroad on designated missions.
It can be found in clause 9 of the bill.
Senator Eaton: Does an income tax reduction for deployment mean they pay less taxes or does that mean they pay no taxes?
Mr. Leblanc: It means they pay no tax on the earnings, basically the employment income associated with the mission abroad. They are able to deduct that amount.
Senator Eaton: Thank you.
[Translation]
Senator Forest: Do these exemption measures also apply to employees of our diplomatic corps?
Mr. Leblanc: Thank you for the question. No, they apply only to the members of the Armed Forces and police officers.
Senator Forest: Thank you.
[English]
The Chair: We will move to the next measure, which will be artificial losses using equity-based financial instruments.
Mr. McGowan: This measure amends two currently existing rules in the Income Tax Act relating to synthetic equity arrangements and securities lending arrangements in order to prevent tax planning that could seek to undermine the purpose of those rules. It essentially tightens up and ensures the appropriate operation of those rules.
Synthetic equity arrangement rules were introduced relatively recently. They relate to situations where a Canadian corporation, generally a financial institution, receives a dividend on a share from another Canadian corporation.
Because of our intercorporate dividend rules in the Income Tax Act designed to prevent multiple levels of corporate taxation on the same income, dividends between Canadian corporations are generally tax exempt or effectively tax exempt. The amount of the dividend is included in your income, but there is an offsetting deduction.
Under these arrangements, the dividend received would be paid to a tax indifferent counterparty, like a pension fund or a non-resident, through a derivative financial arrangement like a total return swap as a dividend compensation payment. If you look at the cash flow and say a $100 dividend comes in, that results in a $100 inclusion of the dividend as well as a $100 intercorporate dividend deduction. When the dividend compensation payment would be paid out to the counterparty, that would provide a $100 deduction in computing the income of the financial institution.
You have $100 included once and deducted twice. While there is essentially no economic impact on the financial institution receiving $100 and then paying it on, it has generated a $100 artificial loss.
These rules were recently enacted a few budgets ago in order to present this type of tax planning. This measure responds to potential gaps in the rules that have been identified since their introduction to ensure they apply appropriately and can’t be avoided.
The second set of rules relates to security lending arrangements. These have been around somewhat longer and essentially relate to securities lending arrangements and purchase arrangements where a financial institution that owns shares effectively lends them to a counterparty. The counterparty might receive a dividend and have to pay it back to the Canadian lender.
At some point in the future, they are required to return the shares to the Canadian lender. The tax rules apply to ensure the lending of these shares isn’t treated as a disposition. The securities lending arrangement transactions facilitate liquidity in capital markets. They are not tax planning techniques, but it ensures that the appropriate tax consequences arise. Tax planning arises when you engage in a securities lending arrangement or a repurchase arrangement.
This measure responds to recent tax planning that tries to technically fail to meet certain conditions in the securities lending arrangement rule tests. They are called broken SLAs, or broken security lending arrangement planning, to avoid certain aspects of the rules and obtain a double deduction which generates an artificial tax loss. This improves upon the language in the securities lending arrangement rules so they apply appropriately and can’t be avoided by this type of tax planning.
It can be found in clauses 10 and 27 of the bill.
The Chair: As there are no further questions, I bring to the attention of all senators that charities and political activities are on page 14 and we are now on page 10. Therefore the next measure is improving access to the new Canada Workers Benefit.
Mr. McGowan, the floor is yours.
Mr. McGowan: This measure, as its name suggests, improves access to the new Canada Workers Benefit introduced in the budget and enacted as part of the first budget implementation bill. It replaces the former Working Income Tax Benefit and provides more generous support for affected workers.
This measure ensures that every individual who is entitled to claim the Canada Workers Benefit can receive it. Currently, with the Working Income Tax Benefit, taxpayers would have to apply for the tax credit in order to receive it. Many Canadians who would otherwise have been entitled didn’t apply for the credit, either because they didn’t know about it or some other reason. They were not receiving the Working Income Tax Benefit despite being otherwise entitled.
This would allow the Canada Revenue Agency to assess whether or not an individual is entitled to the Canada Workers Benefit. Even if they didn’t claim it, they would still be entitled to claim it to make the process move more smoothly. If they don’t claim it, they can still receive it when the Canada Revenue Agency assesses their taxes. It ensures everybody who is entitled to the Canada Workers Benefit will receive it.
It can be found in clauses 12 and 35 to 38 of the bill.
Senator Omidvar: In your estimation, to what extent will this measure increase the uptake? Do you have a sense of the numbers of people who will benefit, as opposed to the Working Income Tax Benefit regime?
Mr. Leblanc: Once the Canada Workers Benefit is online starting in 2019, we estimate that over two million low and modest income workers will be receiving the benefit. About 300,000 of those individuals will benefit because of the specific measure in the bill before you. In other words, those individuals are not claiming the benefit on Schedule 6 as it stands right now.
The Chair: Thank you.
[Translation]
Senator Forest: Technically, to receive the credit, there must be a tax return. The issue is that many of the most vulnerable people in our society don’t file tax returns. Do we have measures in place to identify these people, or do people need to file a tax return to receive the credit?
Mr. Leblanc: Thank you for the question, senator. You’re absolutely right. People need to file a tax return to benefit from this measure. This isn’t part of a bill, but the government has taken major steps to help people complete their tax return forms.
The resources allocated to the community volunteer income tax program have increased significantly. The Canada Revenue Agency has been mobilizing volunteers across the country, including accountants or people who are familiar with the field, to help people — especially the most vulnerable individuals, as you said — complete their returns. It’s an important initiative.
Another initiative is being led by Service Canada. The initiative is a support measure for Indigenous people. In the 2018 Budget, the government allocated funding to support this important initiative.
These initiatives will support the measures that have just been mentioned.
Senator Forest: Well done. It’s quite a challenge to reach all these clients who don’t report their income, because they don’t have any income.
Mr. Leblanc: Thank you.
[English]
Senator Marshall: This is a follow-up to what Senator Forest just said. I think you hundreds of thousands of individuals were eligible but haven’t claimed.
Will it be the Canada Revenue Agency that will do the follow-up to determine if individuals are eligible? It sounds like a massive undertaking.
Mr. Leblanc: Actually, the 300,000 estimate that I just shared with your colleague are individuals who are filing tax returns now. They are filing the returns but they are not claiming what is now the Working Income Tax Benefit.
One of the things about the rules now is that the Canada Revenue Agency is not able to calculate it for them. There are a couple of fairly technical reasons for that. One is that there are certain types of earned income, such as income earned on a reserve or income earned as an emergency services volunteer, that CRA basically doesn’t have the information at their fingertips.
Right now, as the rules stand for the Working Income Tax Benefit, CRA isn’t able to process the claim because CRA doesn’t know the amounts it requires. If someone doesn’t declare those amounts, the legislation proposes to allow CRA to consider those amounts as zero. That would allow CRA to do the calculation.
If you are a student who has done three or more full-time months of education, you’re not currently eligible for the Working Income Tax Benefit. That will continue to be the case for the Canada Workers Benefit. To do the calculation the CRA needs information on whether someone is a student. There will be a requirement for educational institutions to provide the slips they are providing to students anyway as part of their claims for their tuition tax credit.
With those adjustments, the CRA will be in a position to do the calculation for those who haven’t done it themselves.
Senator Marshall: The question should really go to the Canada Revenue Agency. It just seems that logistically it will be a lot of work. I guess the Canada Revenue Agency will have to devote resources to it. Thank you.
[Translation]
Senator Forest: I have a brief comment, Mr. Chair.
Well done. We’re finally starting to see a heartbeat in the Canada Revenue Agency. Congratulations!
The Chair: It was more of a comment than a question.
That said, we’ll now look at the next measure.
[English]
Before we move on to the next measure, I am asking that the following officials from Environment and Climate Change Canada please come forward: Ms. Meltzer and Ms. Vachon. Mr. McGowan and Mr. Leblanc, you can stay there because we will be asking you more questions.
From Environment and Climate Change Canada, we have Judy Meltzer, Director General, Carbon Pricing Bureau.
[Translation]
She’s joined by Isabelle Vachon, Senior Legislative Policy Advisor, Legislative Governance.
[English]
To both officials, thank you for accepting our invitation. The measure is entitled climate action incentive payments.
The floor is yours.
Mr. McGowan: This measure provides a refundable tax credit mechanism for the delivery of climate action incentive payments. This refundable tax credit would be paid annually and would be the mechanism for delivering these types of payments.
It can be found in clauses 13, 18 and 19 of the bill.
Senator Marshall: Is this something that will cost the government money because it is a refundable tax credit?
Mr. Leblanc: My colleagues from Environment and Climate Change Canada will want to add to this, but the overall principle is that certain jurisdictions have been determined not to meet the Canada-wide federal benchmark for pollution pricing and the federal system will apply. Basically what we’re talking about here underscores the important principle that the direct proceeds collected in one of those provinces will be returned directly to the province of origin.
The large majority of the direct proceeds will be returned to individuals and families through what is called the climate action incentive, which is what Mr. McGowan described for us. It will be an amount that individuals claim for the first time on their 2018 tax return when they file those returns in early 2019. This is the general principle.
I guess there are two parts to your question. Money is coming in through that federal pollution pricing, but it is going directly back. It will cost a certain amount to administer.
Senator Marshall: I am looking for the numbers.
Mr. Leblanc: Let me find them here. It is in table A1.7 of the Fall Economic Statement. I will follow up with the page number, senator.
What we have there is the cost of administration. For the climate action incentive it’s actually a generous estimate that will be reduced when we go through the Treasury Board process for reflecting the number of provinces where the climate action incentive will actually apply. That will be four provinces.
Senator Marshall: Are the numbers broken out by province?
Mr. Leblanc: In terms of the administrative costs that I just mentioned, no, they aren’t.
Senator Marshall: No, but the climate action incentive payments.
Mr. Leblanc: There was an announcement on October 23 in terms of the amounts of the direct proceeds that will be coming in through the regulatory charge on fuel. We can provide to the committee afterward the Backgrounder: Ensuring Transparency document.
There is a table for the four provinces that shows the projected fuel charge proceeds. Then it shows small amounts of targeted relief. It also shows the net fuel charge proceeds in the table for Ontario. Then it has the climate action incentive that makes up the large majority of the direct proceeds.
There will also be targeted support for particularly affected sectors. Small and medium enterprises, municipalities, universities, colleges, schools, hospitals, Indigenous communities and non-profit organizations would be examples. Then you end with a bottom line of zero.
Direct proceeds come in and they go directly back to the province of origin.
Senator Marshall: At no cost.
Mr. Leblanc: There is a table for each of the jurisdictions.
Senator Marshall: Is that in the backgrounder document?
Mr. Leblanc: That’s in the backgrounder document.
Judy Meltzer, Director General, Carbon Pricing Bureau, Environment and Climate Change Canada: No, I don’t have anything to add. That is correct. The commitment has been consistent in returning all direct revenue from the federal system back to the jurisdiction of origin.
We could certainly provide that detailed backgrounder that was posted online on October 23.
Senator Pratte: I understand that the overwhelming majority of taxpayers in these four jurisdictions will actually receive more from the climate action incentive than they are expected to pay on the carbon levy.
Could you elaborate on that? Do we know, for instance, what percentage of taxpayers will receive more? How is that possible?
Mr. Leblanc: We know what the climate action incentive payments will be. In fact, one of the important features of these payments is they won’t vary by income. They will only vary by family size. For individuals in small and rural communities, defined as those living outside census metropolitan areas, there will be a 10 per cent supplement to the amount. Those are the ways in which the amounts will vary.
We have estimated both the direct and indirect costs to households resulting from the federal pollution pricing system. A direct cost is essentially household purchases of vehicle fuel and natural gas.
We have taken account of indirect costs. Those costs are embedded in the prices of goods and services other than fuel and natural gas. An example of an indirect cost might be that of a contractor deciding next year to pass on the extra costs of driving a truck to and from a home bathroom repair job next year. We assume that businesses pass along all their costs to consumers.
It is something that will take a bit of time. It’s a fairly strong assumption, but it’s one we have made for the purposes of these estimates. About seven out of 10 households in the four jurisdictions receive more in climate action incentive payments than the indirect and direct additional costs they will bear as a result of the federal pollution pricing system.
Costs can vary even if you take a family of the same size with the same income. The extra costs they will face can vary significantly because of the consumption choices those households make.
That is basically where we are with the numbers.
Ms. Meltzer: I have a couple of points in response to that question. It’s not always the case, but typically a higher income household will have a larger carbon footprint. They would be purchasing more and perhaps more fuel-intensive vehicles. In the return of revenue to mitigate cost impacts on households, low and middle income households would disproportionately receive more back.
The idea is that there is an opportunity for further savings. If a household chooses to invest in further energy efficiency or insulation, there is more to be saved in the return proceeds.
On your question about how it is possible, it’s a return of the full direct revenue. The decision was made to reallocate 90 per cent to households. One question often comes up in relation to this: Is there any dampening of a signal? That’s not the case. Regardless of how you return revenue, the price on pollution signal is still effective regardless of how the revenue is used.
Senator Pratte: I have seen the numbers for Ontario and Saskatchewan. Would you care to give us a couple of examples of what a typical household would pay as a result of the carbon pricing system and receive via the climate action incentive?
Mr. Leblanc: These are in the background paper published by our colleagues at Environment and Climate Change Canada on October 23, the day of the announcement of the federal pollution pricing system.
In Ontario, on average, a household will receive $300 in the first year or 2019 from climate action incentive payments. The average increase in costs, measured as I just described them in the last response, would be $244. That would be an example.
Both the climate action incentive payment amounts and the cost impacts vary across the four jurisdictions because the types and quantities of fuels used varies across those four jurisdictions. In each of the four jurisdictions the principle is the same. Direct proceeds come in but then go directly back to the province of origin, mostly through the climate action incentive payments, with the remainder going to particularly affected sectors.
Senator Pratte: Is my understanding correct that for people who live outside census metropolitan areas or CMAs would get a 10 per cent increase on the incentive?
Mr. Leblanc: Yes, that is correct.
Senator Pratte: They would be considered rural residents who would get the 10 per cent.
Mr. Leblanc: We call it a supplement for rural and small communities. It will be a short schedule on the tax return. You will fill out the amount for yourself. If you’re in a couple, you will fill out the amount for the second adult and the amount per child. Then you arrive at a total. If you’re eligible for the supplement because you live outside a census metropolitan area you boost the number by 10 per cent, and that’s the total amount you will claim on your tax return.
Senator Eaton: Perhaps I am not as sophisticated, but I don’t understand. If we are to claim a surcharge but then get it back, how is that a disincentive? If I get money back for putting fuel in my car or for heating my house, how is that a disincentive?
Ms. Meltzer: The price signal will be there, for example, in the purchase of fuel.
Senator Eaton: Stop right there. I usually buy the most expensive fuel because it’s supposed to be the cleanest. That is what they claim. How will that impact what I get back?
Ms. Meltzer: The way pollution pricing works is that it enables choices. Some consumers, like probably you and me, will choose to use a particular type of fuel, will decide to save money by using public transport for those who have access to it, or will decide whether their next vehicle will be hybrid, electric or not. The choices will vary depending on the consumer and the level of income. Different price points will have a different influence on consumer choices.
Senator Eaton: If I decide I am taking the bus more, how will you know that?
Ms. Meltzer: The estimate is on what is the total potential cost from pricing carbon pollution. Then a household will receive a rebate or a climate action incentive payment.
I will give a purely hypothetical example of a household incurring costs from pricing carbon pollution of $300 in fuel over the course of the year.
Senator Eaton: Do they need to keep their gas, furnace and heating receipts?
Ms. Meltzer: They don’t need to keep track of it. I am just giving an example. I will finish the example. If it is not clear, I am happy to clarify further.
In total, if the price of carbon pollution is $300 a year for a household on an incremental cost of a carbon-intensive fuel, a particular type of home heating fuel or perhaps an energy bill, again hypothetically, the proceeds may be returned at that same amount that year.
Perhaps a household made a decision to purchase less fuel or an individual made a decision to improve energy efficiency. Maybe there is an incentive to put in a high-efficiency furnace. Then their costs the following year may only be $200, but they wouldn’t receive less. There is a saving and an incentive through pricing and proceed return.
I can tell by the look on your face that maybe wasn’t clear.
Senator Eaton: I could spend less on fuel and home heating. I could save a lot by heating my house at 65 degrees, by turning off the heat in some rooms and by using a generator.
Ms. Meltzer: That’s right, but you don’t need to track that in order to get the proceeds return.
Senator Eaton: How will you know that I’ve lowered my costs?
Ms. Meltzer: I’ll give my initial answer and then turn to my Finance colleagues. The cost per household or the amount at which proceeds will be returned to households is based on an estimate of what the average household cost would be in a given province.
It’s worth reiterating that costs can vary across households.
Senator Eaton: If I am really good, lower the heat in my house, take the bus and she doesn’t, am I going to be averaged with her.
Ms. Meltzer: You’ll get more back because you will have spent less.
Senator Eaton: How do you know that?
Ms. Meltzer: You don’t.
Mr. Leblanc: The only thing I would add, as I mentioned, is that the average climate action incentive payment in the first year in Ontario will be about $300. Again, these amounts vary across the four provinces.
How did we arrive at that amount? Based on our current projections, we expect to collect about $1.8 billion in proceeds from the regulatory charge on fuel. As we explained, the bulk of that money will be returned. The bulk of it is going back to the province of origin through climate action incentive payments. That works out to about $1.6 billion. There are about 5.3 million households in Ontario, so it works out that the amount people can claim on their tax return will be about $300 per household.
I can give the example from my household. I am married. I have two children. I think my spouse will claim it rather than me. It is one per couple. My spouse will claim $154 for herself, $77 for me as her spouse and $38 for each of our children, for a total of $307. That will be her climate action incentive payment.
Senator Eaton: If all of the people in the province of Ontario make no changes, it won’t change what we get the following year.
Ms. Meltzer: The amount the following year will reflect the price on pollution. The benchmark price under the federal system goes up $10 per year out to 2022. It starts at $20 a tonne. The climate action incentive payment reflects that increase, so it would increase the following year.
You are right. A household that made changes to reduce fuel consumption or find energy efficiency savings would get the same amount back as a household that hadn’t changed. Depending on a whole range of factors, households may have lower or greater carbon-intensive costs.
In that regard those who reduce will save more and those who don’t will get that same rebate, but maybe it won’t offer the same savings. There is a built-in incentive to that approach because it rewards and creates an incentive for those who are able to make choices to reduce their carbon footprint.
Mr. Leblanc: In the aggregate, as Ms. Meltzer explained, we expect that as the regulatory charge on fuel will go up, the climate action incentive payments will be adjusted.
We think that prices matter. The amounts of the direct proceeds claim won’t increase in perfect lockstep with the increase in the fuel charge because they will be reflecting some changes in consumption in response to the incentive.
What the payment amounts will be in future years will be taken into account as we estimate climate action incentive.
Ms. Meltzer: I understand the backgrounder will be in the public domain and will lay it out per province by year and per size of household, with the dollar amount. It will help provide further clarification.
[Translation]
Senator Forest: It’s a new form of taxation, and it’s quite complex. I was wondering whether you provide relief to specific sectors, such as agriculture, fisheries and remote communities. There’s no relief for municipalities that emit a certain level of CO2 on a daily basis, for example to clean the streets and collect garbage. If I’m the mayor of a municipality, the consumer prices will be automatically reflected in what I’ll pay in terms of the product, and my main source of income to cover this is property tax. My constituents pay the property tax with a net salary, so they’ve already paid tax on this too.
Doesn’t this constitute double taxation, particularly in the case of municipalities whose mission is to provide daily services to residents, to Canadians who will be taxed twice? This will affect their tax refund.
Mr. Leblanc: Thank you for your question and your thoughts. We’ve just discussed incentives to address climate change in the form of payments to individuals and households. Most of the proceeds resulting from the fuel charge will be used for these payments. There are also other programs and there will be other measures to support the particularly affected sectors. These sectors include municipalities.
I think that the government recognizes that municipalities can’t pass on all the costs to their residents. There are payments for households, which are included in the bill, but there will also be support measures for a number of groups, including municipalities.
Senator Forest: In reality, the municipalities’ mission is to ensure that the buses run and that the streets are clean. The snow plow must come through before the garbage can be collected. Fire trucks, taxis — The very nature of the municipalities’ mission makes them CO2 emitters, and 75 per cent of the revenue in the current municipal financial structure comes from property tax. They must therefore impose a tax on taxpayers.
I think that there should be measures for the municipalities, given this reality.
Ms. Meltzer: I apologize. I’ll answer in English for the sake of clarity.
[English]
I have two points. As my colleague mentioned, there is recognition within the return of proceeds that a portion should be dedicated to support municipalities, universities, schools, hospitals and the non-profit sector, et cetera.
The other point I would indicate is that it creates the same incentive and saving opportunities. In different municipalities we recognize that circumstances, location, population base, options and choices will vary, but it does create some more incentives.
The final point I would make is that we’re talking about the extension of pricing pollution across the country. This has been in place in many jurisdictions in Quebec, and in the case of British Columbia and Alberta for over 10 years. For the majority of municipalities it is not a new proposition but I appreciate the question.
Senator Neufeld: I have a comment about averages. They sound great all the time, but I will use an example that I used when we implemented the carbon tax in my own province.
There is a small population in the north, compared to a large population in the south, and we know who loses in those kinds of things. It costs a lot less to heat an average house in Vancouver than it does in Fort St. John, but the average return is the same. I use that example because we already have a carbon tax. We could use that same example in Ontario. It would cost less in Toronto than it would in the very north of Ontario to heat an average home. Averages don’t take that into account. Averages are something across everyone. That’s just a comment.
Will all of the basic costs of what you’re talking about in the carbon tax be returned? By that I mean the GST applied to all of those costs. Actually the GST increases as the price increases. Is the GST inclusive of any taxes such as the excise tax that will be divided up and returned in those provinces? Or, does the federal government just keep what excess GST it would get? I think that is the answer.
Gervais Coulombe, Director, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Under the proposed approach, the direct proceeds from pricing carbon pollution are intended to be returned. In the backgrounder which my colleagues presented earlier, the transparency is computed based on the direct proceeds from the fuel charge.
Other revenues could be generated, such as the GST or penalties and fines. They are not included in the amounts to be returned under the proposed approach.
Senator Neufeld: When the government says that they are returning all of the money, that is actually not quite correct. I guess I will use proper words; it is not quite correct or polite. They are not returning all of it.
Mr. Coulombe: The line that has been used is the return of direct proceeds. This is an important distinction. I would add that the government is not intending to generate more GST revenues than it currently has because the increased price may translate into a decrease in consumption of other goods in Canada.
The overall GST/HST revenue envelope is not intended to decrease because of the introduction of carbon pricing at the federal level.
Senator Neufeld: That is kind of like saying people aren’t going to pay as much tax so it’s even-steven.
To be truthful to Canadians, the federal government says they will return it all but they are keeping whatever increase is attributable to the GST on all the products for themselves. That is the correct way to tell the people.
Mr. Coulombe: The federal system has to be reviewed as part of the pan-Canadian framework. In provinces and territories like British Columbia, Quebec or Alberta, which already have a carbon system in place, the GST/HST attributable to increased costs due to these regimes remain in Canadian coffers.
I guess an amount of fairness has to be taken into account while looking at the policy as a whole.
The Chair: I would like to recognize and bring to the attention of the viewing public Senator Forest-Niesing and Senator Klyne who are both new permanent members of the Finance Committee.
Thank you for accepting the invitation to be members of our committee.
Senator Klyne: I want to pick up where Senator Pratte left off, and Senator Neufeld set the table a bit for me.
I am from Saskatchewan. I won’t give you a geography lesson, but much of it is rural and many of the vehicles are pickup trucks. We are leading in the nation, I imagine, per capita. Most of those are working and many of the households are outside the CMA. I want to talk about that 10 per cent modifier for households outside the CMA.
Our public transportation has been compressed to almost nothing. Greyhound has left. Saskatchewan Transportation Company has been wound up. I am wondering what you will do. I am curious how the 10 per cent modifier was calculated. I don’t want to get into the nitty-gritty of that but more so the question around what if it is identified that 10 per cent is not enough, recognizing that many of the vehicles in the non-CMA are working vehicles. In many cases the pickup is the family vehicle and very reliant on fossil fuels.
I don’t see any plan on the immediate horizon to have charging stations for electric vehicles. I don’t see public transit on the horizon either. They are very reliant on fossil fuel vehicles without alternatives. I am not sure how your modifier works when you get into northern remote rural areas.
Mr. Leblanc: The government recognizes what you have been describing. For those who live outside big metropolitan areas there is less access to energy efficient transportation options. There is more reliance on vehicles, as you described. To take Saskatchewan outside the Regina and Saskatoon census metropolitan areas, everywhere else in the province individuals will be eligible for the 10 per cent supplement for small and rural communities.
It is hard to pinpoint the 10 per cent. We have a good sense there is a difference. Frankly, understanding the exact magnitude of the difference is challenging. There was a sense that 10 per cent was a good place to start. As colleagues have said, the government will reflect on these things on an ongoing basis. The government sees it as an important part of the climate action incentive. By extension, it is an important part of its approach to pollution pricing.
Senator Klyne: This takes us back to the conversation about averages and the 10 per cent modifier. I live 10 minutes outside the CMA. I will probably get the 10 per cent modifier. However, northern remote rural communities and First Nations communities have to travel into the CMA for professional services. They have no choice. There are no alternative public transportation opportunities. The trek to go for a doctor’s appointment or legal consultation is significant. In these rural remote areas it is nothing to have to jump into a vehicle and have to drive two or three hours to get to an urban centre.
The government needs to focus on that, monitor it closely and make adjustments, not sit back and reflect on it, because we are a small population relative to other jurisdictions and may not get the attention.
Mr. Leblanc: The government was trying to strike a balance between recognizing that costs can vary across the population in an important way, especially between large metropolitan centres and more rural areas. With Senator Marshall we talked about the administrative costs associated with climate action incentive payments.
As you can tell by many of our measures, the Canada Revenue Agency can deliver in an efficient way. That was one of the big reasons for choosing the T1 tax returns. The idea is that it is an efficient vehicle for getting these amounts back to individuals and families.
Again, that’s part of it in terms of the incentive payments. I don’t know if colleagues want to add more generally.
Ms. Meltzer: I will add two points. This brings up an important point. Obviously there is a high level of awareness that somebody who lives in downtown Ottawa or downtown Toronto has more options available to them than somebody living in a rural or remote community, as was noted.
One point is that it will undoubtedly be one of the important considerations as part of the reviews of pricing carbon pollution in all jurisdictions. More to the point, the return of proceeds in climate action incentive payments and the rural top-up are one of several measures that try to take into account that distinction.
For example, rural communities and farmers do not have a price on pollution from biological emissions on farms. Farmers will be able to purchase gas and diesel used on farms without the fuel charge included. We know that there are limited options in remote communities that are off grid. They rely on diesel for electricity generation and will have an exemption. There is a suite of ways in which those differences are recognized within the system.
As a reminder when we talk about this, it is one important mitigation tool. It’s one of a whole suite of measures under the pan-Canadian framework that include other investments in infrastructure and low carbon economy funds.
I don’t have the details on how those can specifically address some of the questions you have raised, but I would be happy to follow up. This is one piece, but it’s part of a much broader system that does try to take into account those points.
Senator Andreychuk: To follow up on what Senator Klyne and Senator Neufeld asked about climate action incentive payments, the other types of fuel exemptions, et cetera, are geared to a specific. Here you have a broad average and you are to hand people $300. I don’t see the incentive in a province like Saskatchewan.
The province has its own carbon program and plan. It couldn’t come to an agreement with the federal government, so the federal government is saying they will give all of the people $300, or whatever amount it is. As Senator Klyne said, I don’t think people will equate that as an incentive to stop using fuel. They will see $300 given by the federal government. That’s what they will see.
Tell me how that will change any of their attitudes on climate action. I do not see it and I don’t hear it in my province.
Ms. Meltzer: To clarify, in October 2016 when the approach was announced as part of the pan-Canadian framework, it was designed to take into account that there were already pricing systems in place in various jurisdictions. The federal approach is what we refer to as a backstop approach where it only applies in jurisdictions that request it, prefer to have the federal government implement a system, or where a system is not in place. This fall on September 1 was the deadline for all provinces to confirm their plans either to maintain or implement their own system or request the federal system.
On October 23, the government’s announcement was to confirm where the federal system would apply. One of the things it confirmed was that it would apply in part in Saskatchewan, recognizing that Saskatchewan has proposed and plans to implement a price on carbon pollution for a portion of its heavy industrial sector. That sort of approach is designed to take that into account.
In terms of the incentive it goes back to the same question. The price signal is there when people are making choices in terms of the goods they purchase. It creates an incentive from economic theory, practice and real life. The price signal can make a difference in terms of people’s choices and certainly higher income. It may take a higher price differential for it to sway a decision, but we know that choice is influenced by price signals.
In terms of the incentives, a rebate at the end can mitigate cost impacts. It can also enable further savings. If somebody decides to reduce the cost of carbon pollution, they will save more by getting the climate action incentive payment. That incentive is at the back end because of the savings opportunity. We know that the pricing system is at the front end.
We know these systems work. We have already mentioned pricing pollution in other jurisdictions. We know they are efficient because it is based on people’s choices and not on prescribed ways in which people have to reduce or not reduce emissions. This similar tool was used to reduce acid rain decades ago. Market-based tools create a price signal so that people can make choices and emissions are reduced where they cost the least. That is the underpinning principle to the approach.
Senator Andreychuk: To respond to that, you made my point. Every other program that I am aware of was tied directly. The incentive was there for an industry or for a segment of society. Here, there will be a handover to people, and I don’t think there is proper analysis, in my opinion. People are debt ridden. The economy is vulnerable in Saskatchewan. I think they will make choices about how much money they have and where they place their money. The $300 will not make a difference to them at all.
Senator Pratte: Following Senator Neufeld’s question on the GST, I am trying to see what difference it will make for consumers. My calculations are probably not correct, so maybe you could help me out. My understanding is the pricing on carbon in 2019 will add around 4 cents a litre to the price of gasoline. Is that correct?
Mr. Coulombe: At $20 a tonne, as of April 1, 2019, it will be a charge of 4.42 cents a litre.
Senator Pratte: Let’s say 4 cents per litre. The GST/HST on that will be 15 per cent on 4 cents or six-tenths of a cent per litre.
Mr. Coulombe: The federal GST rate is 5 per cent.
Senator Pratte: It would be two-tenths of a cent on 4 cents.
Mr. Coulombe: Yes.
Senator Pratte: Let’s say you “filler up” with 40 litres at two-tenths of a cent. Probably Mr. McGowan or Mr. Leblanc could calculate that rapidly.
Mr. Leblanc: It would be 8 cents.
Senator Pratte: The GST component of the carbon levy would be 8 cents on a 40-litre fill-up. Are my calculations correct?
Mr. Coulombe: We have to add a caveat. A lot of GST/HST revenues from businesses are generally recovered through input tax credits, so it’s difficult to make that kind of direct relationship.
Another example comes to mind. If some fuels are being included in the price of a zero-rated commodity under the GST/HST framework such as basic groceries, in the end you may not have such an impact.
Senator Marshall: We are talking about estimated proceeds, and I know Senator Pratte just went through some detailed calculations. The proceeds are estimated. The administrative costs are estimated. There is an estimate as to how much will be paid out to taxpayers or to residents.
How reliable are your numbers? Sometimes the numbers we are given aren’t reliable like in the case of Phoenix. When you increased the tax rate for high-income earners, the revenues didn’t materialize initially. How good are your numbers? At what point do you take a look at your numbers and say, “Wow, what a windfall for the government,” or “What a cost for the government.” Could you just talk about that?
Mr. Leblanc: We think the numbers are pretty good, but the chances that they are perfect are pretty slim.
We talked about the principle that direct proceeds come in and are returned to the province of origin. I talked about the backgrounder on transparency. We will make sure all the links to these backgrounders are shared with you. It is described in that backgrounder how there will be a truing-up at the end of a certain period, just to make sure. It’s essentially an accounting: What were the proceeds in province X and what was returned to either individuals or households in particularly affected sectors? If it turns out that they are not in sync, there will be adjustments in future years.
Senator Marshall: Will it be done on an annual basis?
Mr. Leblanc: It will take a little while. With the way the climate action incentive payment works, we will have already set the amount for the next year by the time of the truing-up. It will be in a future year.
If you think of a cumulative amount over time, given that they are estimates, an important part of the process will be that truing-up. Where proceeds are higher than amounts returned or vice versa, they will be accounted for and made right over time.
Senator Marshall: What is the back-up plan? If the proceeds coming into government far exceed what is going out to consumers, is it the intention that what is going out to consumers will be increased? Is that the commitment?
Mr. Leblanc: That’s what the government says. It will take some time to determine that. If you think of it being on tax forms in a certain year, what does the Canada Revenue Agency have to do? It has to print the forms. It has to work with software providers. Then those are the amounts for a year. It’s going to be a future year but there will be that truing-up.
Mr. Coulombe: To add one point of clarification with respect to the collection of the fuel charge, senator, you may remember the conversation last spring that fuel distributors and producers would generally remit the fuel charge to the CRA on a monthly basis. Given the October 23 announcement and with the implementation date of April 2019 for the fuel charge, by the end of May fuel distributors and producers will have to remit the fuel charge to the Canada Revenue Agency and the Department of Finance will receive that information a few weeks after that assessment.
Senator Marshall: Say the proceeds aren’t as high as what the government estimated and say we go into a recession, is there a commitment to give out those cheques? Will that change? Will those cheques go out in that amount regardless?
Mr. Leblanc: Those amounts will be set and those amounts will be going out. Between 2019 and 2022 we will have a fuel charge that is increasing over time from 20 to 30 to 40 to 50. Basically what would happen in the situation you described is that the future climate action incentive amount would go up, but not by as much as it would have had the scenario you described not materialized. There will be an adjustment there.
Senator Marshall: It sounds like a nice, simple, clean formula, but my experience has been that things don’t always work out like in that nice neat little formula, but thank you for the explanation.
The Chair: Before we move on to the next measure, I am prompted to ask a question following on a question asked by Senator Klyne.
For clarity, could you walk us through the exercise? Is there any specific support for First Nation reserves and northern communities that rely more heavily on fossil fuels for transportation, heat and electricity? What will they receive? What will be the impact on those communities of what you’re proposing to the Finance Committee?
Mr. Coulombe: As part of the October 23 announcement, we released a backgrounder specifically targeted at Indigenous peoples. We will provide the committee with that backgrounder.
The proposed measure that is in front of the committee today is about returning climate action incentive payments. It is not about the other suite of measures, including those for First Nations and Indigenous peoples, that is being developed by the government and will be announced at a later date.
Mr. Leblanc: As Mr. Coulombe just told us, what is before you now are the climate action incentive payments. If we think of a question Senator Forest asked earlier in relation to the Canada Workers Benefit, people will need to file tax returns to claim and receive the climate action incentive.
We know that filing rates in First Nation communities aren’t as high as they are for the overall population. I described the measures that increased funding for the Community Volunteer Income Tax Program and the Service Canada initiative, in particular, that is providing in-person support by Service Canada officials for the purposes of helping people with tax filing on reserve and in remote and northern Indigenous communities. Access to the payments we have been discussing will be supported by these initiatives.
The Chair: Walk me through it. Let’s say that I am a First Nation person and I don’t file any income tax. How can my family benefit?
Mr. Leblanc: Someone in the family will need to file the return. I have just described some cases where people feel they don’t have the information or support they need to file a return. These initiatives provide that information and support. People will be visiting the community and offering that support.
It is not only a question of receiving climate action incentives. People also have to file returns to receive, as we just discussed, the Canada Workers Benefit, the Canada Child Benefit and the GST credit. It’s another part of an important initiative that is being taken on. Someone from Service Canada will visit and offer that support.
The Chair: Does the comment I just heard mean that we have not prepared a proper chart for First Nations on reserves identifying who qualifies and who doesn’t?
Mr. Leblanc: We have a sense of what qualifies you for different benefits. It’s getting people to file the return. People have to identify themselves as looking for that support, as being able to use the service that is being offered.
The Chair: As a parliamentarian I am asking how you will identify those people.
Mr. Leblanc: Given the size of the communities, calls will be out. It will be publicized and people will be encouraged to make use of these services.
Given the privacy involved in tax filing, it is hard to go to particular people and ask, “Did you file or not?”
The Chair: I am looking at the time frame here, but you just opened the door that we need more clarity.
Mr. Leblanc: We can follow up with further information.
The Chair: Could you please do that?
Mr. Leblanc: We would be glad to help facilitate that.
The Chair: There should be a measurement for First Nations and Inuit. We all know it’s the highest percentage of unemployment.
Senator Eaton: We have been troubled by the committee AG reports on how the CRA performs. When I am listening to you this morning and the questions which seem quite complex, have you put into place or discussed with the CRA how they will manage this whole new set of tax measures?
Mr. Leblanc: We work closely with our colleagues throughout the Canada Revenue Agency. To take the climate action incentive payments as an example, we have been in discussions for a good amount of time. They are making clear the steps that people have to go through to receive these amounts when filing their 2018 returns in 2019.
Here are the steps they have to go through. Here is the development of the system. Here is the testing of the system. These things undergo several tests.
Senator Eaton: Have you started?
Mr. Leblanc: They have started.
Mr. McGowan: When we are developing the draft legislative proposals, Canada Revenue Agency is generally in the room with us.
Senator Eaton: They have been for years, and we have seen that they don’t always perform.
The Chair: To the officials, you can see that it ignites a lot of questions.
Senator M. Deacon: Perhaps this is an easier comment or question, or we might be a little gun shy. As senators, we listen to a lot of folks. Some of the things you have just described in response to Senator Eaton require a different way of doing business, with lots of what we call checks and rechecks and certainly setting benchmarks.
If we want to go in this direction, how do we get there and how do we know we are done our work? I use the words “gun shy” because as senators at this table in the last year we have heard of many great efforts. However, cultural changes and shifts need to happen to be successful.
We care passionately as senators about ensuring that this is done right too. I don’t know how to say it anymore candidly.
The Chair: We still have the passive income measure to look at. Mr. McGowan, do you have any comments?
Mr. McGowan: The measure you mentioned relates to passive income. It’s a follow-up from amendments made as part of the first budget implementation bill and arose from our ongoing stakeholder consultation.
It provides an explicit allocation rule in the very limited circumstances where losses arise in a particular taxation year are carried forward and applied against Part IV taxes, which are refundable taxes. It’s not a very common occurrence that losses are used to offset them.
When they are applied against Part IV taxes they can affect the new refundable tax pools introduced as part of the first budget bill of this year. This measure provides an optimal result for taxpayers insofar as the losses are first applied to reduce Part IV taxes that feed into the non-eligible refundable income tax on hand pool, the less valuable pool for taxpayers, before they are applied to reduce the eligible refundable dividend tax on hand pool, the more valuable tax pool for taxpayers. In a very particular circumstance it provides certainty and a taxpayer optimal outcome where these losses are applied and can affect the balance of two different tax pools.
It can be found in clause 15 of the bill.
Senator Andreychuk: We heard a lot of discussion that tax reform on farms had to be special. The minister at one point had put it aside for discussion. How will this measure impact on Canadian farms in practice?
Mr. McGowan: I don’t want to oversell the likely impact of this measure in practice. It is very limited in its likely application to the set of circumstances where you carry forward a loss in a year and apply against Part IV taxes. These taxes are applied on certain dividends from other private Canadian corporations. It would have to be enough to fully utilize additions to one pool over another.
There are very limited circumstances in which it will apply, but when they are applied they will provide the optimal result for taxpayers. Their less valuable tax pool is first reduced before the more valuable and more flexible tax pool is affected. The measure that was enacted as part of the first budget bill was silent on how these losses might apply vis-à-vis the two separate pools. The questions came in: Do they affect them pro rata and can taxpayers choose? This measure provides certainty and the optimal result for taxpayers.
To the extent that a family farm corporation could be in a circumstance where this measure would apply, it would ensure that their tax results are optimized and that they get the results they would want.
Senator Andreychuk: It is a change from the existing system. The question I am being asked by farmers who have incorporated is: What is this going to do to me? I waited to ask the officials what it’s going to do to them.
Mr. McGowan: This is a change and a clarification. As I said, the rules that were enacted as part of the first budget bill didn’t contain any specific mechanism for how you would apply losses against these two separate pools. This provides clarity and certainty for affected taxpayers, in addition to providing the optimal result for them. They get the result they would have been able to choose, which is the preservation of their eligible refundable dividend tax on hand.
It is a new measure. It provides certainty as to how these losses are applied for taxpayers. It is purely relieving in that regard.
Senator Marshall: When you look in the supplementary information for this item it shows that over five years the government will pick up an additional $1 billion. We’re looking at all these changes to small businesses and how much additional revenues the government will raise as a result.
What kind of revenues did the government raise from small businesses before these numbers went into effect? I am trying to gauge the magnitude of the $l billion in changes. How much did government raise last year from the taxation of small businesses?
Mr. McGowan: I’ll first mention the impact of this measure in the bill. As I said, it provides certainty where there was no specific rule in the Tax Act saying against which pool these losses could be applied. There was a question about how you would do it: whether it be applied pro rata against the two or whether a taxpayer could choose. It provides the result that a taxpayer would have picked, which is the preservation of their more valuable tax asset.
As I also said, it applies in an extremely limited number of cases every year. You would need to use a loss carried forward from a previous year to offset a refundable Part IV tax. You would get the Part IV tax back when you pay dividends. Taxpayers don’t typically use the valuable carryforward loss to offset refundable taxes, but there are a very small number of taxpayers to whom this measure could apply.
Senator Marshall: But it is $1 billion.
Mr. McGowan: This specific measure in the bill is not reflected in the table in the tax measures supplementary information.
Senator Marshall: It says, “Refundability of taxes.”
Mr. McGowan: That is right. Those relate to the two measures included in the first budget bill. This is a further add-on and clarification following up on the first budget measure related to refundable taxes in private corporations.
Senator Marshall: I am still interested in an answer to my question. The government will raise a lot of additional revenues as a result of increasing taxes on small businesses. We can relate back to the total taxes they paid in the most recent fiscal year to gauge the magnitude of the changes.
The Chair: Can you provide additional information on that through the clerk?
Senator Marshall: I think you will be back this afternoon.
The Chair: This afternoon is good.
To the officials, thank you very much.
(The committee adjourned.)