Proceedings of the Standing Senate Committee on
National Finance
Issue No. 95 - Evidence - May 14, 2019 (morning meeting)
OTTAWA, Tuesday, May 14, 2019
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to study the subject-matter of all of Bill C-97, An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2019 and other measures.
Senator Percy Mockler (Chair) in the chair.
[Translation]
The Chair: Honourable senators, I see we have quorum. I declare the meeting in session.
[English]
My name is Percy Mockler, Chair of the Standing Senate Committee on National Finance.
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.
[Translation]
Now I would like to ask the senators to introduce themselves, starting on my left.
[English]
Senator Klyne: Martin Klyne, Saskatchewan.
[Translation]
Senator Forest: Welcome and good morning. Éric Forest from the Gulf Region of Quebec.
Senator Pratte: André Pratte from Quebec.
[English]
Senator Duncan: Pat Duncan, Yukon.
Senator M. Deacon: Marty Deacon, Ontario.
Senator Boehm: Peter Boehm, Ontario.
Senator Moodie: Rosemary Moodie, Ontario.
Senator Eaton: Nicole Eaton, Ontario.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
The Chair: Thank you. Honourable senators and members of the viewing public, today we begin our consideration of the subject matter of Bill C-97, which was referred to the committee by the Senate on May 2.
[Translation]
Bill C-97, An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2019 and other measures, is known as a budget implementation act.
[English]
For your information, the sponsor of the bill is the Honourable Senator Boehm.
This type of legislation is squarely in line with the National Finance Committee’s mandate.
To begin our examination of the bill, we will go over the entire bill that we have before us and a number of officials from the Department of Finance.
To the officials, Mr. McGowan, Ms. Lavoie and Mr. Leblanc.
[Translation]
I’m told that you will be the spokespersons. You will also act as a resource person to help answer senators’ questions.
[English]
To begin this examination, welcome to all of you. I know a number of your colleagues are in standby in the audience ready to step in if need be.
Thank you for being with us today and ready to answer our questions to help us do a complete examination of the votes in Bill C-97.
[Translation]
That being said, we expect you and your colleagues to review the provisions of the bill and explain them.
[English]
If it is all right with you, we would like the opportunity to ask questions as they pertain to each part explained in the bill to make sure that we have a full understanding before we move to the next part of the bill.
I have been informed that the person who will make the first presentation will be Mr. McGowan, to be followed by Ms. Lavoie and then Mr. Leblanc.
Mr. McGowan, the floor is yours.
Trevor McGowan, Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: Thank you, senator. Just to confirm, I will go through each of the measures in Part 1 of the bill. Part 1 relates to the income tax amendments. After each measure, there will be an opportunity to ask questions on that measure before moving on.
The first measure in Part 1 of the bill provides a temporary accelerated capital cost allowance rate for qualifying zero-emission vehicles.
Capital cost allowance is essentially taxed depreciation and providing an enhanced capital cost allowance rate of 100 per cent, in this case, entirely deductible in the first year, provides an incentive for businesses in respect to the acquisition of qualifying zero-emission vehicles.
These are vehicles fully powered by electric, hydrogen or certain plug-in hybrids with a battery capacity of at least 15-kilowatt hours.
In addition, the rules provide a new threshold for zero-emission passenger vehicles as to what can be deducted under the capital cost allowance regime. For normal passenger vehicles, that’s currently $30,000. This would be increased to $55,000 in respect of qualifying zero-emission vehicles. That’s an amount that could be deducted under the capital cost allowances.
Again, based on the enhanced deduction, 100 per cent would be deductible in the first year. If there are any questions, we’d be happy to answer.
Senator Eaton: It’s a wonderful aspirational thing, but, first, there are only one or two fully battery powered cars on the market right now — I might be mistaken — that are very expensive. There are very few plugs. The distances are not great. I couldn’t drive to my cottage, for instance, which is a two and a half hour drive in a fully battery-powered car. What do you expect this will cost government, and how many people will this apply to?
Maude Lavoie, Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance Canada: Thank you for your question. There were many elements to your question. Starting with the cost of the measure, it’s expected to cost $265 million for the period 2019-20 to 2023-24.
You were asking how many people would benefit from the measure. This is a measure that’s available for businesses. In the budget, there’s another incentive that is a point-of-sale rebate for consumers. Anyone here could qualify. In this case, it’s a measure for businesses rather than individuals.
Senator Eaton: Fine. But what about the infrastructure needed? It’s all very well if I have a fleet of taxis and I put plugs for when they come back. What do they do when they’re on the road? Is there a subsidy to build plug-in infrastructure along gas stations and other places? How long will it take to recharge the batteries?
Ms. Lavoie: There is also a measure in this bill with respect to plug-in stations that we will address in a moment. We can answer questions about that.
You were also asking about the number of businesses. I don’t have that specific number with me, unfortunately.
Senator Eaton: I don’t mean to be disrespectful, but to come up with the $265 million number, you must have had to put so many people per year against that number.
Ms. Lavoie: I agree. That’s information we could provide to the committee. I don’t have it with me at the moment, unfortunately.
Senator Eaton: Could you send it to us? Because it’s interesting.
Ms. Lavoie: Yes.
The Chair: Through the clerk, please.
[Translation]
Senator Pratte: I would like to know, with regard to the amount of $55,000, how it was determined that this amount was the correct price, and whether this price includes options. The price suggested by the manufacturer may be higher or lower depending on the model and the options chosen. Does this price include options?
Ms. Lavoie: Under the current legislation, when companies incur expenses, they can be deducted from their business income, but there are limits in the case of vehicles. For gasoline-powered vehicles, it is $30,000; it is a limit set so that medium-duty, non-luxury vehicles can qualify, but, for companies that choose to have larger, more luxurious vehicles, the portion exceeding $30,000 is non-deductible. These are the current rules. If a company chooses to purchase a vehicle for $40,000, $30,000 is deductible from this amount, but not the $10,000 difference. There are virtually no electric vehicles for less than $30,000; electric vehicles are much more expensive right now. Therefore, the limit has been increased from $30,000 to $55,000 to reflect the fact that, in the case of electric vehicles, the same models will cost more. It was to ensure that companies that choose electric vehicles were not penalized. Before the proposed changes in the budget, a company that purchased an electric vehicle for $45,000 would still have been limited to the $30,000 deduction allowed. So it’s really about representing the average electric vehicle versus the average gasoline-powered vehicle; that’s why the limit was raised, in consultation with people from the Department of Transport.
As for your second question, whether or not options are included, this amount of $55,000 represents the amount deductible by the company from the purchase price of a vehicle, regardless of the price established by the manufacturer.
It is part of the discount that has been proposed for individuals, but it is not a concept that is present in the case of accelerated deduction. It is simply the deductible part of the purchase price.
Senator Pratte: Therefore, companies that take advantage of this program will be able to deduct the purchase amount at 100 per cent in the first year. What is the usual capital cost allowance period when purchasing a vehicle?
Ms. Lavoie: In the case of sport utility vehicles, the rate normally applied is 30 per cent. For other types of vehicles, such as trucks to transport goods and taxis, it is 40 per cent. It depends on the type of vehicle purchased, but it’s either 30 or 40 per cent currently.
Senator Pratte: You mean it’s 30 to 40 per cent for the total deduction, or 30 to 40 per cent for the first year?
Ms. Lavoie: It’s 30 or 40 per cent for the first year, then the second year is 30 or 40 per cent of the amount that wasn’t deducted in the first year, and so on.
Senator Pratte: Thank you.
[English]
Senator Marshall: Could you repeat the estimate you gave Senator Eaton for the total cost of this program?
Ms. Lavoie: Certainly. That’s $265 million for a five-year period.
Senator Marshall: The format of the budget book changed a bit. I know the annex is no longer a separate document; it’s integrated into the big book. Is that figure under Transport Canada and also Natural Resources Canada?
Ms. Lavoie: No. It appears on page 352 of your budget.
Senator Marshall: It’s in the annex.
Ms. Lavoie: All the tax measures that will be discussed under this part, the cost is —
Senator Marshall: The items that are under Transport Canada and Natural Resources relate to individuals, don’t they? Okay. Those are the ones.
What provinces can take advantage of the charging stations? I don’t know if we have any charging stations in Newfoundland.
Ms. Lavoie: The aspiration of the government is that these charging stations become more prevalent across the country. There’s also an incentive that will be discussed later on with respect to charging stations.
The networks are more developed in certain provinces for sure, but the objective is to help the faster adoption of this technology.
Senator Marshall: The $265 million that you mentioned, is that broken down by province? Can you break it down by province?
Ms. Lavoie: I will have to see what’s possible. Again, we can provide more information.
Senator Marshall: Based on my knowledge of my province, I don’t know if there are any charging stations. This is not something we would be able to take advantage of. Could you check on that for me, please?
Ms. Lavoie: The provinces of Quebec, Ontario and B.C. are the ones where the adoption has been the most prevalent, but I don’t know about Newfoundland.
Senator Marshall: If you could double-check, that would be appreciated. Thank you very much.
Senator M. Deacon: I want to make sure I can do that this morning. My question is in the poverty reduction area of this submission. I want to confirm that we’re going through all aspects of the presentation, not just one particular area.
My question relates to the area of poverty reduction.
The Chair: Senator, the format that we’ve adopted is the officials make a presentation. In this case, the presentation that they’re making is for temporary, enhanced first-year capital cost allowance. Poverty will be later.
Senator M. Deacon: That was my question. My apologies.
My question has already been asked in this area. Thank you very much.
The Chair: Thank you very much. On poverty, you will be the first.
Senator M. Deacon: Thank you very much.
The Chair: Next we will deal with Part 1(a).
[Translation]
Senator Forest: My question is on two subjects. First, it seems to be particularly relevant to businesses, and, I imagine, municipalities and any organization other than an individual. I have seen this situation in my municipality, where we have decided to buy small electric maintenance vehicles for parks, for the flowers, and so on, for less than the amount mentioned here, rather than using larger trucks that produce a lot of emissions. Have we considered the possibility of including vehicles like these in the category of eligible vehicles, which cost, from memory, something like $33,000 or $34,000? It is a whole fleet of vehicles normally intended for people who do landscape maintenance or municipalities who do fleet maintenance. Vehicles that produce high emissions are often used, and alternative vehicles that are small electric vehicles or small electric trucks can be accessed. Has this possibility been considered?
Ms. Lavoie: I will answer two elements of the question. You asked if municipalities could take advantage of the incentive; in fact, it is an incentive for businesses subject to taxation, so it is not necessarily the case for municipalities. Eligible vehicles are vehicles that, according to the definitions in the Income Tax Act, are mainly used on the street or on highways. If the vehicles in question are used in parks instead, in theory, they would probably not qualify for the incentive. These are issues of interpretation that the Canada Revenue Agency will have to assess, but in theory, we are talking about vehicles used on the road, which are vehicles eligible for the incentive.
Senator Forest: These vehicles can be used on the road. However, they’re constantly stopped and they produce a high level of emissions.
This brings me to my second question on the assessment of the program’s impact. The document refers to $300 million or $253 million. Let’s say that you use all the money and that private companies join the program and submit applications. This means that you’re using your full $253 million budget. How many tonnes will we save? Have you estimated the cost per tonne of your product’s efficiency?
Ms. Lavoie: In this case, this type of analysis is conducted by the Department of Finance, the Department of the Environment and the Department of Transport to try to assess the effectiveness of the measures. Incentives for companies of this nature tend to generate lower costs per tonne. One reason is that accelerated deductions mean that companies have less tax to pay in the first year. However, in the second and third years, the deductions used in the first year are no longer available. Over time, this money is recovered by the government. It’s a bit like an interest-free loan, where the value for companies is the immediate tax savings.
For the government, over time, the deductions will be recovered. This means that the cost per tonne will be lower than other options.
Senator Forest: That’s excellent tax logic. However, the goal is to reduce greenhouse gas emissions. As such, I wondered whether all the options had been assessed. We’re investing $300 million to reduce greenhouse gas emissions. We’ll look at cost-effectiveness per tonne to see where we can be most effective in reducing greenhouse gases. From a tax perspective, I understand that you’re right. This approach has a certain logic. However, in terms of the end goal, I was wondering whether this analysis had been done.
Ms. Lavoie: Other items were included in the budget. This measure applies to companies. There’s also a measure for individuals and incentives for charging stations. It’s a set of measures. The government has opted for a comprehensive strategy that covers different sectors.
Senator Forest: I understand that you’re currently unable to tell me whether they’ve actually done an analysis?
Ms. Lavoie: This type of analysis has indeed been done.
[English]
Senator Duncan: My question really follows up on Senator Forest. This measure seems to me to be very targeted to the key-populated areas. Rural Canada and northern Canada are completely left out of this tax measure in that, for example, it’s targeted at businesses and fully electrical vehicles. I can see, for example, the Government of Yukon has one semi-electric. We do have a charging station, but that little vehicle is used to run around in the major centre.
If we want to encourage businesses — for example, construction, parks, the people driving parts to and from construction sites — they are small businesses, and we want to encourage them to change their habits from diesel pickup trucks to something like a hybrid vehicle, for example, or even a fully electric vehicle. It misses those.
I have two questions. Please, may we have the breakdown by province and territory? Could we have the rationale of why this large part of Canada, beyond the populous areas, are left out of this measure?
Ms. Lavoie: The businesses will have an incentive to purchase those charging stations and to purchase these types of vehicles that qualify for the incentive. The objective is to deploy or encourage the deployment in all areas of the country. It’s true that at the present time, the level at which this has been developed in each part of the country has been different. Any business in any part will have the same incentives.
Senator Duncan: Why is it specifically passenger vehicles?
Ms. Lavoie: For both passenger vehicles and for vehicles like trucks — the limit of 55,000 only applies to passenger vehicles. If you are buying a delivery truck or a truck to deliver your goods, that will also be eligible. In that case, there is no limit.
So the limit is only for cars and SUVs, for those smaller passenger vehicles. All other types of vehicles that are purchased by businesses, such as trucks and taxis, would also qualify for this measure.
Senator Duncan: Thank you.
Senator Klyne: Much of what I might say really plays on some of the comments already made.
When I think about business development and those creating the jobs, it’s small businesses. This is maybe somewhat insular because you have a critical mass in central Ontario. When I think about Alberta and Saskatchewan, largely our corporate centres are at the lower end of the province, in the south. When you look to the north, there’s not a critical mass to speak of. It took quite a while to get that connectivity gasified with natural gas and so on for Saskatchewan.
I’m thinking about these charging stations. Outside of SaskTel, we don’t see a lot of people making investments in towers. It’s done largely by Crown corporations.
Just to speak to the businesses that create the jobs in Canada, it’s small businesses. I see you are highlighting passenger vehicles. When you look in Saskatchewan and Alberta, if you go into the repair shops, you will see a lot of half-tonnes. If you go to the repair shops in Ontario, you will see a lot of passenger vehicles. These half-tonnes and pickups need some torque because they are usually hauling trailers. The further north you go, that’s more the case where there’s natural resource development going on.
I don’t see how we will get to participate in that, but it’s very important because those are the ones creating the jobs, small businesses, and the working vehicle is largely a pickup. That’s not to stereotype anything. That’s just a matter of fact.
I’m wondering, did you consult with auto manufacturers to figure out when some other vehicles might come online that could participate in something like this? When you’re looking for some torque and heavy haul in your pickup, I don’t know of a fully electrical, zero-emission vehicle out there they can use, number one, and I don’t see a network of charging stations coming over the horizon here anytime soon. Quite often as well, these people who use these pickups for work, it’s also the family vehicle.
The final thing is passenger vehicles with small businesses are usually leased. How does that work here? Could a refund like the carbon tax for personal income tax work its way in here instead?
Ms. Lavoie: I’m not sure which element of your question to address first. Let me know if I’m forgetting certain elements.
With respect to pickup trucks, it’s true that right now I don’t think there are electric models available. There are certain larger trucks, however, that I know are being used in the mining sectors and are pretty big.
So the advancement of the technology is not equal, but certainly what the industry has been conveying is that they’re all looking towards multiplying the offer in terms of the types of vehicles that are electric or plug-in hybrids because it seems this is what consumers want, to have more choice in terms of the types of electric vehicles or SUVs that could be purchased on electric.
The types of vehicles that are used across the country, it’s not only for passenger vehicles. Again, a delivery truck, taxis, these types of vehicles could also qualify. It’s a question of whether they are available in electric form. Sometimes yes, sometimes no. It seems, from what the industry is saying, they are going towards a bigger range of types of vehicles that will become electric, hybrid or plug-in hybrids over time.
Senator Klyne: So with passenger vehicles, using delivery trucks as an example, there’s going to be a lot of lost productivity because you’re not going to get too far before you have to stop and recharge. Recharging doesn’t just happen in a matter of moments. That’s something else to consider.
The Chair: That was a comment. Thank you.
Honourable senators, Part 1(a) is completed, and we will move to Part 1(b).
Mr. McGowan, please make your presentation.
Mr. McGowan: The next measure relates to the donation of cultural property. The tax rules currently have a number of enhanced tax incentives for the donation of cultural property to a qualifying institution. Those include the elimination of any gain that may be deemed to rise on the donation of the property. Currently, there are two requirements that need to be met in order to obtain these enhanced tax incentives. The first is that the property be of national importance, and the second is that the property be of outstanding significance.
In response to our recent court case, which raised concerns for potential donors, with respect to the first criterion, that the property be of national interest. This measure would remove that criterion from the test so that the cultural property would simply need to be of outstanding significance.
The issue of national importance related to questions of whether or not a piece of art might qualify, for example, if the artist were not Canadian. If you had a Picasso that was of a Canadian subject or had some connection to Canada, there was a question as to whether that would be sufficient in order to get this donation of cultural property, even if it is of outstanding significance. This measure would remove the requirement that the property be of national importance.
The measure also relates to the Cultural Property Export and Import Act. No changes are made in this bill or in this measure that relates to the export of cultural property. This is just for the donation tax credits.
The Chair: Thank you.
Senator Marshall: Who determines the term, “outstanding significance?” Does the Canada Revenue Agency determine that?
Pierre Leblanc, Director General, Personal Income Tax Division, Tax Policy Branch, Department of Finance Canada: No, there is an institution called the Canadian Cultural Property Export Review Board, and their mission basically is to make these assessments.
Senator Marshall: If you were interested in donating something, you would refer it to them and they would make the decision?
Mr. Leblanc: That’s correct.
Senator Marshall: It is a tax credit versus a tax deduction.
Mr. Leblanc: It depends. If a piece of cultural property is eligible, then for individuals like us, it would be the charitable donation tax credit. For a corporation, it would be a deduction. As Trevor mentioned, any capital gains realized on that disposition would be exempt from tax whether it is an individual or a corporation.
Senator Marshall: So it is a deduction on your tax return?
Mr. Leblanc: Yes.
[Translation]
Senator Pratte: I vaguely remember this case and the judgment that led to questions about the interpretation of national importance. Can you remind us of what the judgment determined and why all this resulted in the decision to remove the criterion?
[English]
Mr. McGowan: The concern arising from the judgment was that pieces of art would be required, in order to meet the national importance test, to have — I’m trying to remember the exact words of the case — an intrinsic connection to Canada. One of the main concerns was that works created by non-Canadian artists that nevertheless have outstanding significance could qualify. I gave, just as an example, a foreign artist preparing a painting of a Canadian subject that was a tremendously important piece of artwork might not qualify if the artist was not sufficiently connected to Canada. That was the primary concern arising out of the case that led to this measure.
Again, there would still be the requirement that the piece be certified as being of outstanding significance to qualify.
Senator Pratte: Does this apply to owners of works of art who want to donate one or many of their works of art to a museum, for instance? Is this what we are talking about?
Mr. McGowan: You would have to be a qualifying recipient, but museums, I think, would be a classic example.
Senator Pratte: Thank you.
Senator Eaton: Following on Senator Pratte, if I have a wonderful Tom Thomson and I want to sell it in New York because I can get $40 million for it in New York. That means I would not be able to export it to auction. Is that correct?
Mr. Leblanc: Again, that would be a determination. That’s what Trevor described as not changing as a result of this legislative proposal. That’s basically for the Canadian Cultural Property Export Review Board as part of its general work, so not only for the purposes of determining eligibility for the tax incentive but also for eligibility for export.
Senator Eaton: What I don’t understand is that this measure removes the requirement that property be, in your words, “of national importance,” and then this property be “of outstanding significance?” What’s the difference? Outstanding importance, national significance — that covers the waterfront. You’re basically not changing anything, if you think about it. And we’re talking about Chagall, that whole crisis. Was it of national importance, or is it a property of outstanding significance? Chagall didn’t have any relationship to Canada.
I have a friend who has a very large collection of American 1960s art in New York. He won’t bring it back to Canada, because he figures if he ever wants to sell it, he would never be able to take it out. But it is interesting. Can you tell me the difference between “national importance” and “outstanding significance?”
Mr. Leblanc: I think it is essentially what Trevor touched on earlier. There is no requirement that there be an intrinsic Canadian connection to the cultural property, to the work of art.
Senator Eaton: But what if it was an outstanding Barak or an incredible Picasso in his early blue period? That’s not of national significance?
Mr. Leblanc: It is of outstanding significance, and that’s for the Canadian Cultural Property Export Review Board. The cases you mentioned seem clear. That board could reasonably consider that it is not of any particular national importance, so there is no intrinsic Canadian connection. The proposal is to make sure, for the purpose of tax incentives, that it is only outstanding significance that is to be considered.
Senator Eaton: But not of national importance?
Mr. Leblanc: For the purposes of the tax incentive, no. The proposal is to take that out.
Senator Eaton: I still find it confusing; I’m sorry.
The Chair: I have a question on that matter, and maybe the question I’m going to ask does not fit with this particular measure.
With regard to the Beaverbrook Foundation and Lord Beaverbrook’s paintings in New Brunswick, I don’t have to tell you that it is more than a million dollars. Would this measure have an impact on the ongoing discussions we have with the Beaverbrook Foundation?
Mr. Leblanc: I know generally about the collection, but I don’t know it well enough to be able to opine on.
Mr. McGowan: One factor that may be helpful is that this measure would apply to donations made on or after budget day 2019. I don’t know when the relevant donations were made or if they have been, but this measure applies to donations made on or after budget day 2019.
The Chair: Could you provide, through the clerk, an opinion as to whether the measure we are looking at now would have an impact on what is going on in New Brunswick?
Mr. Leblanc: I don’t know. Basically you have a legislative proposal before you, but ultimately it is up to other institutions. It is up to the Canadian Cultural Property Export Review Board to make any determination. I wouldn’t want to venture something on their behalf.
The Chair: Thank you very much. The question was posed.
Senator Klyne: Looking for clarity here, when it references donations of cultural properties, certain designated institutions and public authorities, is that a general statement, or is there actually a list of those you would like to see receive donations?
Mr. Leblanc: There is a list. That’s something we can follow up on if you like.
Senator Klyne: Yes, please.
Mr. Leblanc: Archives and libraries would be examples of institutions.
Senator Klyne: Our national museums?
Mr. Leblanc: National but also smaller, local museums as well would be included.
The Chair: Thank you. So that concludes Part 1(b).
Senator Andreychuk: This proposal is for the purposes of tax relief. The policy is, should taxpayers get an advantage by having art that’s of some significance or national? That debate goes on. Does it affect any piece of exchange in Canada, or can you go outside the country, sell, but you just wouldn’t get the tax advantage? There is a growing debate about keeping our valuable properties here and some that may have been misappropriated or appropriated.
Is it only the tax that has led to this? Because you are going to say outstanding significance. Who is going to judge that? What is outstanding for me in that? We have delegated it to a board, which is a way of putting it off over there, but that’s not helpful for the average person to understand. What drove this change?
Mr. McGowan: Well, this change arose in response to a court case that raised questions about what could qualify as cultural property of national importance, and comments have been made about the scope of the two terms and how they seem similar and how they are not exhaustive or long definitions. It was up to the courts to determine what “national importance” meant.
A court case interpreted the phrase in a manner that was considered to be narrower than the tax policy for this donation measure. That is what led to this measure, which would remove national importance as a criterion, retaining the outstanding significance test. It was in response to that case and its interpretation of the term “national importance.”
Senator Andreychuk: Is it to encourage or restrict donations by taking out “national importance”?
Mr. McGowan: It would encourage donations by increasing the class of property that could qualify for the tax incentive.
The Chair: We will move, honourable senators, to measures in Part 1(c).
Mr. McGowan: The next measure relates, as with the first, to the capital cost allowance system. This is a large measure announced initially in the Fall Economic Statement for 2018. It provides a temporary enhanced capital cost allowance rate for almost all classes of depreciable property.
As we discussed, capital cost allowance is essentially tax depreciation, and the general rulmoonshote of the Canadian tax system is that capital cost allowance rates generally aligned with the useful life of an asset. Another relevant rule is that in the first year that a capital property is acquired, only half the normal rate applies. For a simple example, if I spend $100 on a property that has a capital cost allowance base rate of 30 per cent, in the first year — this is called the half-year rule — only one half would be deductible, and it works out to a $15 deduction. In the next year, it would be 30 per cent of the remaining balance.
With that general description of our capital allowance system, this measure does three important things. First, it is 100 per cent capital cost allowance rate in respect of certain manufacturing and processing equipment. Second, it provides 100 per cent capital cost allowance rate in respect of certain qualifying green energy equipment. These are equipment included in 43.1 and 43.2 and include, for example, electric vehicle charging stations that we’re going to be talking about later.
Second, it provides an enhanced capital cost allowance rate for almost all other capital property. I say “almost” because there is a class that is already at 100 per cent. Generally all classes of depreciable capital property would get an enhanced 50 per cent above the normal rate deduction.
Third, for qualifying property, it eliminates the half-year rule. That restricts the deduction available in the first year a property is acquired in respect to these qualifying properties.
In my earlier example, if you pay $100 for something that is a 30 per cent rate, you would get an additional 50 per cent deduction, giving you a $45 deduction instead of the normal half-year rule applying, which would be $15.
It provides that base incentive across a wide variety of assets.
Lastly, as I said, this is a temporary enhanced first-year capital allowance measure; so depending on the type of asset, the rates would be gradually phased out.
We’d be happy to answer any questions.
Senator Marshall: What’s the total cost of that initiative? I can’t find it in the budget book. It must be outlined in the Fall Economic Statement. How much is it?
Ms. Lavoie: It cost $14 billion.
Senator Marshall: That’s over five years?
Ms. Lavoie: Yes.
Senator Marshall: The classes of machinery and equipment that this would apply to, would be specified in the legislation?
Mr. McGowan: That’s correct.
Senator Marshall: This will match what’s happening in the U.S., I take it? That’s probably why we’re doing this.
Mr. McGowan: Yes, senator, you’re absolutely correct. This forms a large part of the government response to the recent U.S. tax reform.
Senator Marshall: I saw something yesterday, I think from the Canadian Chamber of Commerce, that they’re asking for comprehensive tax reform, but we haven’t gone down that road yet. We’re just doing things like this.
Because this program costs so much — the government is into performance indicators now — is there some performance indicator established so we can measure how effective this change is going to be?
Do we measure the impact on the economy of this tax change? Or is that too narrow an area?
Ms. Lavoie: All the elements of the measure will apply to all types of capital investments in Canada. It’s definitely not narrow. It will apply to all the capital investments by businesses. The objective is to provide an incentive to invest in Canada.
Over time I suppose one could look at the level of investment in capital and see the Canadian performance.
Senator Marshall: Will we be tracking its impact on the economy? When the big infrastructure program was implemented, it was envisioned it would have a certain impact on our gross domestic product, on the economy.
Ms. Lavoie: It’s always very difficult to track the impact of a specific measure like this because investment is driven by a range of different factors. It’s multiple — the availability of labour and minerals. There are so many factors at play. It’s very difficult to say what the impact of a measure in particular has been.
Senator Marshall: We’re hoping this will have an impact. Thank you.
Senator Pratte: Forgive my ignorance. The manufacturing and processing machinery and equipment as well as the clean-energy equipment get the full deduction on the first year? What kind of investment remain once you’ve dealt with manufacturing and processing equipment and clean energy equipment? What other investments are we talking about? Land, I suppose, or things like that?
Mr. McGowan: Land is not itself a depreciable capital property. Buildings would be, and we’ve already talked about that. Vehicles would be an example.
You have 14(1). Your intangible capital properties are also in our capital cost allowance system. Vessels are another example. Ships that are not manufacturing and processing equipment. Your computers, just looking around the room, the desks, the chairs and things like that.
Senator Pratte: What is the rationale behind giving the maximum deduction in the first year for the two types of equipment we’re talking about, manufacturing equipment and I understand clean energy equipment obviously but manufacturing?
[Translation]
Ms. Lavoie: In the consultations that the government held before announcing the measure, a certain risk was identified for the manufacturing sector. The sector was perhaps more mobile than other sectors. The American tax reform, which also offered incentives at 100 per cent, estimated that the risk of losing investments in this area was higher than in other sectors of the economy. That’s what the government wanted to address.
Senator Pratte: How will the phase-out work?
Ms. Lavoie: Hold on. We’ll find the place where the topic is addressed.
[English]
Mr. McGowan: How the phase-out works depends in part on the type of property. The accelerated investment incentive applies.
It will no longer be in effect for investments put in place after 2027. So that puts an end date on the program. Different classes of assets are treated somewhat differently in terms of their phase-out between those two points.
Initial either 100 per cent or an additional 50 per cent or three times the normal half-year rate. However you want to define it there’s the initial benefit, and then it would not apply for property put into use after 2027, and then as a midway point the value of it would decrease. Again the specifics depend upon the class of asset involved.
[Translation]
Ms. Lavoie: The 100 per cent rate will apply until the end of 2023 for the manufacturing and clean energy sectors. In terms of the other investments, the rate equivalent to three times the usual rate will continue to apply until the end of 2023. In 2024 and 2025, the 100 per cent rate will fall to 75 per cent. By 2026-27, it will fall to 55 per cent. As of 2028, the standard rate will start to apply.
Senator Pratte: Okay, thank you.
[English]
Senator Eaton: Picking up two things you said, performance indicator incentive to invest in Canada, matching the U.S. with their tax incentives.
Why wouldn’t we have just lowered the corporate tax the way Jason Kenney is doing in Alberta? Wouldn’t that have been simpler all around just to lower the corporate tax period?
Ms. Lavoie: With the reform that the U.S. has done, before their reform, the U.S. had a corporate income tax rate that was much higher than Canada’s and much higher than most other G7 countries. With their reform, their tax rate is now about the same as Canada’s. On average, it is at 25.8 per cent.
Senator Eaton: Yes, but investment in Canada has dried up, foreign investment in Canada. This is lovely to listen to all these explanations if you’re like Senator Marshall, who was once an Auditor General, or a chartered accountant, but if you’re a simple person on the street or somebody opening a business, wouldn’t it have been better to hang a shingle in the window saying we’re lowering corporate tax to lower than the U.S. or make us more competitive that way?
Ms. Lavoie: The choice that the government has made, given that the rate is about the same, is to provide a targeted incentive for investment in order to promote investment and acting in a more targeted way. There are various debates out there. That’s the choice that was made by the government.
Senator Eaton: We’re now higher than the U.S., so it’s a political decision?
Ms. Lavoie: Depending on provinces and states, we’re not necessarily higher. On average —
Senator Eaton: We’re higher. If you listen to business, we’re higher. We went around the country listening to tax people. We’re higher.
Anyway, it’s a decision. I’m not arguing. I just hoped you’d have an explanation as to why we simply didn’t lower the Canadian corporate tax rate.
Mr. McGowan: I could elaborate upon my colleague’s comments.
We, of course, met with a number of stakeholders in response to the U.S. tax reform, as did the minister, and one of the things we heard was a focus on where we make our next investment. One of the ways of measuring that is the marginal effective tax rate, which is different from the nominal tax rate we’ve been talking about, Canada’s 15 per cent federal tax rate or what have you.
Senator Eaton: With provincial add-on, of course.
Mr. McGowan: With provincial add-ons. In the U.S. they have different tax rules as well.
One of the questions we were faced with was for businesses. Where do we make our next investment? As I said, one of the important metrics for determining that is what’s called the marginal effective tax rate. That’s, if you’re making a new investment, what’s your return going to be on that new investment? That’s one of the areas where enhanced capital cost allowance can make a big difference.
Again, this is also in the context of the United States having done a similar measure. If you look at, again picking some simple answers, tax rates are part of the picture but they’re not the whole story. You apply a tax rate based upon the taxable income your business has.
You could have — just to pick a simple example — two equivalent businesses, one with a 50 per cent tax rate and one with a 25 per cent tax rate. Again just for numerical simplicity so I can do the math in my head, they both have $100 of, say, accounting income. But if various tax deductions take the business with the 50 per cent tax rate down to $40 of taxable income, then you’re taxed at 50 per cent of $40. $20 of tax you have to pay. Then for the other business you’re paying 25 per cent of $100, so $25 of tax.
Those are, of course, made up for numerical simplicity but intended to illustrate the point that the headline tax rate that businesses have to pay is part of the story but other things like capital cost allowance rates can make a big difference in terms of investment decisions.
Senator Eaton: I can see that and I can’t argue with you. I can see that for Canadian manufacturers but actually attracting foreign money coming in, I’m sorry, I’ll have to disagree with you. Anyway, the proof will be in the pudding next year if we attract lots of foreign investment. Thank you.
[Translation]
Senator Forest: I gather that the cost of the measure is $14 billion. That’s a huge amount of money. In terms of consistency with the objectives, I had the following thoughts. Have we considered the possibility of an incentive bonus, particularly for clean energy equipment? For example, we could obtain an additional 10 per cent reduction, given the ultimate goal, which is to reduce our greenhouse gas emissions.
Ms. Lavoie: For clean energy equipment, the rate has increased from 50 per cent to 100 per cent under the measure. As with manufacturing equipment, clean energy equipment will benefit from the highest possible rate.
Senator Forest: However, there’s no incentive. If I buy equipment that runs on diesel, will I have the same deduction as when I buy electrical equipment?
Ms. Lavoie: It will all depend on the type of equipment. For example, electric cars and diesel cars won’t be treated the same. One will have a 100 per cent deduction and the other will have a 30 per cent deduction. Equipment that meets the criteria under Class 43.1 or 43.2 will instead be used to generate energy, such as wind turbines, solar panels and geothermal devices. This type of equipment will qualify for the 100 per cent deduction. We really proceed on a case-by-case basis. I can’t say yes in general. If the equipment qualifies under certain classes, it will be eligible for the 100 per cent deduction.
Senator Forest: However, there’s no specific incentive for choosing one piece of equipment or another. For example, if I’m in the far north and I buy a diesel generator, I’ll obtain a 100 per cent deduction. If I had opted for a wind turbine, would I have still obtained a 100 per cent deduction?
Ms. Lavoie: I’m not quite sure how much the diesel generator costs. However, the wind turbine would qualify for the 100 per cent deduction.
[English]
Senator Marshall: I was thinking, when you were answering some of the other questions, do you measure the impact of that on individual provinces? I’m reading it and I’m thinking, “Okay, which businesses in Newfoundland will benefit from this?” I can only think of a few? I would think maybe the fish processing.
Do you have an analysis? You said the program is $14 billion; is that right? Is that broken down by province? What benefit will this be to the province of Newfoundland and Labrador?
Ms. Lavoie: All businesses in Newfoundland and in the other jurisdictions in Canada who make a capital investment will benefit from these measures. There is a manufacturing and processing part. Potentially, in the fish industry, they could qualify from that, but any type of capital investment made by a business. It could be a car, office equipment, a vessel, a boat or a ship. Most businesses will benefit from these measures.
Senator Marshall: If it is going to cost the taxpayers of Canada $14 billion, that’s a lot of money. Do you have it broken down?
Ms. Lavoie: We can see what we can provide to the committee. I don’t have it here.
Senator Marshall: I would like to see what it is by province.
Senator Duncan: I believe I heard an answer to the question, following up on what Senator Marshall was saying in terms of breakdown by province. Of course, manufacturing and processing are not necessarily the northern part of our country, although I did think of Yukon Brewing, for example, and their award-winning scotch. If they were to install solar panels, that would be an investment in clean energy equipment. That’s what I heard you say. Correct?
Ms. Lavoie: Correct, senator.
The Chair: We are still in Part 1(d), please.
Mr. McGowan: The next measure relates to the tax consequences arriving from kinship care programs. These are provincial programs where a child is in custody of someone and can receive benefits from the province under one of these kinship care programs.
This measure does two important things. First, it ensures that amounts received under a kinship care program are not included in income for the purposes of certain income-tested benefits under the tax act. It also ensures that receipt of amounts under one of these kinship care programs would not preclude the child, in respect of whom the amounts are being received, as being considered a child of a parent for the purposes of the Canada Workers Benefit. So the Canada Workers Benefit, the benefit entitlements, can be affected by whether or not you are a parent. This measure ensures that receipt of amounts under a kinship care program would not, in and of themselves, preclude an individual from being considered a parent of a child whom they have in their custody under one of these kinship care programs as being the parent.
If it sounds familiar, it is a follow-up from a 2018 budget measure which said substantially the same thing in respect of receipts of benefits under the Canada Child Benefit.
Senator Pratte: Would you elaborate on what this measure adds to the measure that was included in BIA 2018, if I remember correctly?
Mr. McGowan: Thank you, senator. I would be happy to do so. The Budget 2018 measure responded to a specific concern that had been raised in the context of the Canada Child Benefit, in which case, a concern was raised that receipts of amounts under one of these kinship care programs could prevent an individual from being considered a parent for the purposes of the Canada Child Benefit — that being a very large signature policy of the current government — and change was made quickly in response to that concern.
It was a technical concern based upon the extended definition of “parent” in the Tax Act, where the child would have to be wholly dependent on the adult. The question that arose was, “Well, if you are receiving these amounts under a kinship care program, can you be considered to be wholly dependent?” The previous measure applied only in the context of the Canada Child Benefit. Subsequent to that, based on our further work and discussions with stakeholders, it was determined that similar questions could arise in the context of the Canada Workers Benefit, and so this would extend the same treatment to the Canada Workers Benefit and provide additional clarity on whether those amounts are included in income for the purposes of certain taxable benefits.
The basic answer is that last year’s dealt with the child benefit. This year it is the Canada Workers Benefit and other income-tested benefits.
Senator Andreychuk: There are kinship arrangements on reserves that I am aware of. This does not affect those? In other words, if you are a grandmother or a sister and take care of a child, we’re developing social services on reserves and other Aboriginal concepts. Are those being negotiated differently? Privately? Have they been taken in so that we ensure that there is some equality of benefit? It may not be a tax benefit per se, but equality of benefit for people on reserves who take on that responsibility, which has always been a difficulty — to get enough resources for social programming within the reserves.
Mr. Leblanc: Thank you for the question. What we can say for the purpose of these measures is to make sure those arrangements on reserve are treated the same as other arrangements. Basically, in the case of single individuals, that they get the single parent amount, which is a more generous amount under the Canada Workers Benefit, and that the amount received basically from the government under these kinship programs are not included in taxable income. It would be a general application in that way.
The Chair: I have a question when it comes to family and community services.
You say the measure clarifies that financial assistance payments received by care providers under such a program are neither taxable nor included in income for the purpose of determining entitlement to income-tested benefits and credits. What amount of the budgetary vote would impact this measure?
Mr. Leblanc: Given these are tax measures, they wouldn’t be in the budgetary votes per se.
The Chair: Honourable senators, we will move on to Part 1(e).
Mr. McGowan: The next measure relates to the scientific research and experimental development tax credit. A refundable tax credit enhanced at a rate of 35 per cent as compared to the general rate of 15 per cent can be available for Canadian-controlled private corporations performing scientific research and experimental development work.
Currently this enhanced credit is gradually reduced based on two factors. First is the taxable income of the Canadian-controlled private corporation, and the access to the benefit is reduced over a range. Second is the taxable capital of the Canadian-controlled private corporation. And again, the access to the enhanced credit is reduced over a range from $10 million to $50 million of capital. This measure would eliminate taxable income as a factor in determining a Canadian-controlled private corporation’s access to the enhanced Scientific Research and Experimental Development Tax Incentive Program, leaving their taxable capital as a factor for determining how the access to the enhanced credit is phased out. That would allow, in brief, more profitable Canadian-controlled private corporations greater access to the credit. It would also help corporations where their income is not as consistent, where they might have lesser income in one year, higher income in the following year, while still retaining the capital limitation to ensure it is appropriately targeted.
Senator Marshall: Just for clarification, when I look at the cost of this program to the government, it says $395 million over five years. Based on what you are saying, I’m left with the impression that every Canadian-controlled private corporation that’s affected by this change, it will have a positive impact on them? There will be no CCPC that will be negatively impacted by this program, is that correct?
Ms. Lavoie: That’s correct. The measure will remove one of the criteria to access. And whether or not everyone will benefit will depend on their level of income.
Senator Marshall: So no CCPC will be negatively impacted. Okay. Thank you.
Senator Pratte: I would just like to understand better the rationale behind this change. So what does removing the taxable income as a factor do? What effect does it have and what is the logic behind that?
[Translation]
Ms. Lavoie: Industry representatives approached the government on several occasions to explain an issue that they had identified with the income limit. We’ve included an example on page 381 of the budget. This shows that, in some cases, under the current rules, if the income increases from $600,000 to $700,000, the increase in taxable income may be less than the reduction in tax credits earned. At this time, in some situations, it’s not good for companies to earn more money, because the increase in income isn’t enough to make up for the shortfall in the credits earned through the program. This is seen as a disincentive to growth.
In some situations, companies may not necessarily be able to easily control the increase in income from year to year. They may have a good year, but the current rules would have a negative impact on their income. They would lose more tax credits in relation to the money that they would earn in increased income. This is a real issue for companies that are lagging in terms of the measure that we wanted to correct.
Senator Pratte: How is “taxable capital” defined?
Ms. Lavoie: These are the companies’ assets. If you think of a balance sheet, these are the companies’ assets.
Senator Pratte: Is it based on the previous year, on the taxable capital of the previous fiscal year?
Ms. Lavoie: Yes.
Senator Forest: I’d like to understand this scientific research and experimental development credit. If my company isn’t big enough, for example, to have a research department, but I decide to partner with an applied research centre that has not-for-profit status, are the research funds that I invest through that partner eligible?
Ms. Lavoie: Research contracts are eligible.
Senator Forest: The tax credit varies according to the characteristics of the company, including its legal status. Is this status defined according to whether the company is incorporated in Quebec, for example, or according to a Canadian or foreign status? How do you define the legal status?
Ms. Lavoie: The research program has two components. One component gives companies access to a 35 per cent refundable tax credit. This program focuses on Canadian-controlled small businesses and Canadian-controlled private companies. All other companies are eligible for a 15 per cent tax credit. The second credit is universal, which means that the credit is for all companies that conduct research in Canada.
Senator Forest: Thank you.
[English]
Senator M. Deacon: This one got me a little stuck. The answers you have given so far are greatly appreciated. Thank you for being here. I was trying to look at the “why,” and the rationale and the positive-negative impact over time and the size of companies. I’m very passionate about scientific research and development, absolutely.
The last three answers have helped me quite a bit, but do you have an example? I don’t care what the company is, but how would this be working for a company in the last year or two, now, and over the next three to five years? That would help me wrap this one together.
Ms. Lavoie: We can potentially use the same one that’s in the budget, page 381. If you don’t have a copy, I can walk you through it. Currently, a firm that has a taxable capital $10 million could see its taxable increases from $500,000 to $600,000. Currently, it would be losing access to the SR&ED benefit. It is gradually reduced in that range. It would be a reduction of $200,000 of SR&ED tax credit for the increase of $100,000 in taxable income. With the new measure, the taxable income will be ignored. And so as long as their taxable capital is within the range, they will keep their access to the SR&ED credits. In my example, there would be no change in the value of the SR&ED benefits because of the increase in the taxable income, so long as their taxable capital remains under the thresholds.
Senator M. Deacon: Thank you. I saw the example you had. What I was trying to think about when I reviewed that is how that fits in a company, that’s why I was trying to wrap that example around a real one. So if you could just give me a sense of that company that you are describing in the budget document, where that would fit in the range of company sizes that would be gaining from this, I would appreciate that.
Ms. Lavoie: So these would be companies that have taxable capital which total assets between $10 million and $50 million, so they are mid-size term firms, really.
Senator M. Deacon: Thank you.
The Chair: We now conclude Part 1(e) and we will move to measure (f) providing support for journalism. Mr. McGowan please.
Mr. McGowan: This measure provides support for Canadian journalism in three different ways. Just to get some of the terminology out of the way first, in order for an organization to qualify for each of the three measures, it would have to be a qualified Canadian journalism organization. That new definition is set out in the bill and, in doing so, it would need to meet a number of conditions. One is that it has to be a journalism organization. There are restrictions based on what you might consider “Canadianness”, whether it is controlled by foreign corporations and so on, and those depend in large part upon the type of entity involved. There are different roles for corporations versus trusts and so on, but they have to be Canadian. And they also have to be a journalism organization. There are rules relating to what qualifies as journalism for this purpose.
Last, they would have to be designated by a new body that would be established. That would be as a result of the output of an advisory panel that is to be established for the purposes of providing advice with respect to this measure. That concept, a qualified Canadian journalism organization, is relevant to each of the three measures although each of them has their own additional restrictions.
The first measure within the journalism measures relates to adding qualified donee status for registered journalism organizations. This would be a qualified Canadian journalism organization that has applied to the Canada Revenue Agency to be registered, through essentially the same process as registered charities or registered Canadian amateur athletic associations. Their status as a qualified donee would allow them to, most importantly, provide charitable donation or would provide donation tax receipts for donations they received, which could allow individuals a donation tax credit or a donation deduction. An additional requirement for this would be that the journalism organization would need to be not-for-profit in order to be registered. The additional exemption from tax for qualified donees would not be as important as the ability to issue donation receipts to individuals and to accept donations from charities.
The next measure introduces a 25 per cent refundable tax credit on salary or wages paid to eligible newsroom employees of certain qualified Canadian journalism organizations. This credit would be subject to a cap of $55,000 for a qualifying newsroom employees. That works out to, as a 25 per cent credit, $13,750 maximum per qualifying newsroom employee. The newsroom employees are not just journalists, they could be editors or people who work on layout — people who work in the newsroom towards the production of original news content.
The third measure is a temporary, non-refundable 15 per cent tax credit on amounts paid by individuals for certain eligible digital subscriptions. That’s a temporary tax credit that allows for up to 15 per cent of the cost up to $500 per year for a qualifying digital news subscription.
That’s a brief summary of each of the three components of the support for Canadian journalism measure. I would be happy to answer any questions.
Senator Marshall: You are saying that the Canada Revenue Agency has to register the qualified donee. Who determines if it is a qualified Canadian journalism organization? Is that the same thing?
Mr. McGowan: No, the definition of a qualified Canadian journalism organization is proposed in 248(1), the general definition subsection of the act. It lists a number of criteria that would need to be met in order to qualify. There are a number of factual criteria that would need to be met. Those could be ascertained by the Canada Revenue Agency in their normal application of the tax rules. In addition, there is a requirement that the journalism organization be designated for the purposes of the qualified Canadian journalism organization by a body that’s prescribed for the purpose of the definition of qualified Canadian journalism organizations. There are essentially two prongs to the test. One is the criteria set out, and I think that’s in paragraph A of the proposed definition. Then in paragraph B, you have the designation criterion. That would be by a body prescribed for the purposes of the definition of a qualified Canadian journalism organization. The details on who or what that body would be, depends upon the output of the work of the independent advisory council that will be created for the purposes of these measures. It was announced, I think, in the fall economic statement of 2018 and reiterated in this year’s budget.
Senator Marshall: It is one of the new organizations, but it sounds kind of cumbersome.
I would like to talk about the dollar amounts because, in the budget, it indicates that it will be half a billion dollars over five years. How did you arrive at that figure?
Mr. McGowan: Sorry, that is in total for each of the three?
Senator Marshall: Yes. Qualified donee status is $96 million, refundable labour tax credit is $360 million and the tax credit for eligible digital subscriptions is $138 million. So it is about half a billion dollars over five years. How do you come up with that number?
Mr. Leblanc: Basically, for each of the three measures it is our best estimate of what it will cost the government. How many individuals in the case of the digital subscription measure, how many for the qualified donee member for not-for-profit journalism organizations, how much will be donated to these — basically how many such organizations might be set up and what donations might be. As Mr. McGowan described, how much will be paid out in either credits for individuals or deductions.
Senator Marshall: So have you actually identified organizations or individuals that would probably avail?
Mr. Leblanc: Not specific organizations, but it is just a question of our best assessment of how many.
Senator Marshall: Could we access that information? Could you provide that to the committee?
Mr. Leblanc: Let me go back and see what we can provide.
Senator Marshall: Yes, I would be interested, because it is half a billion dollars. Thank you.
[Translation]
Senator Pratte: I can immediately identify a conflict of interest as a former journalist and former newspaper manager.
I have several questions. I’m trying to understand the relationship between the new advisory body and the criteria set out in the legislation. Wouldn’t the Canada Revenue Agency, rather than an advisory body, usually interpret the criteria in the legislation?
Ms. Lavoie: There will be two advisory bodies. The first will advise the government on the credit eligibility criteria. Organizations that want to benefit from the credits must then be designated by the entity, and we don’t yet know which entity it will be. Some parts of the definition may be established by the Canada Revenue Agency, such as the determination of whether the entity is Canadian.
The entity will be made up of experts and will be in a better position to determine whether the content is really original journalistic content and whether the employees who qualify, and who will submit expenses, will be the ones who actually produce the news. These aspects require a little more journalistic expertise and analysis, and the entity’s opinion will be very important. Some aspects of the tax credit may be verified by the Canada Revenue Agency.
Senator Pratte: Excuse me, but I don’t have the bill in front of me and I haven’t read that part. Does this mean that, after the first advisory body has provided advice, the criteria in the legislation could be changed?
Ms. Lavoie: They’ll give advice to the government, and the government will then decide whether certain criteria should be changed. I can’t tell you whether they’ll do it.
Senator Pratte: My next question concerns the status of charities. Some charities are concerned about the possibility of a decrease in the donations that they receive in favour of donations to journalism organizations. Have you considered this?
Mr. Leblanc: Thank you for the question. The cost of the measure is quite modest. The senator spoke of about $600 million. This measure constitutes less than one-sixth of that amount. It’s really a matter of reallocating donations.
We anticipate that some donations will result in an annual long-term cost of approximately $11 to $15 million. We’re not talking about a large number of donations. In terms of tax expenditures for tax credits for charitable donations or corporate deductions, we’re talking about approximately $3 billion a year. In this context, we think that there may be a few, but not many.
Senator Pratte: Thank you. My last question concerns the personal tax credit for digital subscriptions. I’m always quite skeptical about this type of measure. It reminds me of the tax credit that was once given to people who used public transit, for example, or who bought sports equipment. In the end, we more or less abandoned these measures because we realized that the people who benefited from them were already playing sports or using public transit. It didn’t have a ripple effect. Are you sure that this measure will have a ripple effect, or that it will increase the number of digital subscribers to news organizations?
Mr. Leblanc: Thank you for the question. I think that you raised some good points and that we must be reasonable when it comes to the impact of this type of measure on the number of subscriptions. However, I believe that this measure isn’t like the others, because it’s a temporary measure and it concerns subscriptions purchased between 2020 and 2024. You recently talked about measuring performance and assessing the effectiveness of this measure. I think that we’ll have the opportunity to do so. I think that, for a sector undergoing a transition to the digital world and moving towards digital subscriptions, this measure will only serve to boost these types of subscriptions.
[English]
Senator Eaton: So this $600 million is meant to encourage start-ups in the digital world or in the journalism world?
Ms. Lavoie: It will encourage all organizations that qualify. It could be established as a journalistic organization.
Senator Eaton: Educate me here. You could argue that universities are non-profit, so could a journalism faculty at a university apply for a grant?
Ms. Lavoie: It would need to be an organization that produces original news content. If they are teaching journalism, it’s unlikely to qualify. They would need to be meeting all the criteria in the act.
Senator Eaton: If The Globe and Mail and La Presse set up a foundation and, out of that foundation, produced a bit of journalism or a side magazine, would they qualify?
Mr. Leblanc: It depends on the measure. For the purpose of the qualified donee measure, as Trevor described, it will not only have to be a qualifying Canadian journalism organization, but the organization carrying out the journalism itself would have to be non-profit. That’s an additional requirement that will be assessed in order to determine eligibility for this measure.
Senator Eaton: A lot of digital journalism right now is supported by advertising, so it would not apply and it would not qualify, right? Am I correct? If it lost money, does that mean it’s a non-profit?
Mr. Leblanc: It has to be not-for-profit.
Senator Eaton: You could switch it around very quickly.
Do you know who your customers are for this grant of $600 million over five years? Do you have a list of people you’re trying to encourage? Do you have that list?
Mr. McGowan: For the digital subscription tax —
Senator Eaton: To come up with this idea, you must have heard, “oh, Senator Pratte needs money and Senator Eaton needs money.” You must have had examples of organizations that were failing in journalism that needed money.
Ms. Lavoie: The news industry has been making a lot of representations to the government that they are going through —
Senator Eaton: Do you have a list of those news organizations?
Ms. Lavoie: At this point, what we have is a definition of what will be a qualifying organization. There are still some unknowns around what body will designate these. Most news organizations are likely to want to benefit at least from the labour tax credit, which will provide important support for them.
Senator Eaton: But they have to be non —
Ms. Lavoie: No, for the labour tax credit —
Senator Eaton: It can be anybody; it could be The Globe and Mail?
Ms. Lavoie: For sure. It’s the first measure that relates to being able to receive the charitable donation tax credit. For that one, they need to be not-for-profit. For the other two measures, it can be any news organization.
Senator Eaton: How many organizations will qualify for this tax credit?
Ms. Lavoie: I believe most news organizations will at least seek to qualify for this. I don’t have a number.
Senator Eaton: For the ones that are non-profits, you must have some idea.
Mr. Leblanc: As discussed with Senator Marshall, we can go back and see what we can share in terms of our assumptions. We don’t know. Just to take the qualified donee measure as an example, there will be a not-for-profit requirement. We assumed a relatively small number of newspapers that are currently for-profit, and I think it would be fair to assume that most will probably want to continue on a for-profit basis, but there could be a small number that would be willing to switch to not-for-profit status in order to benefit from this measure.
We’re not able to say it’s newspaper A or B.
Senator Eaton: No, of course not, but you can’t even give me a number. What frightens me about some of these things is there are a lot of assumptions and you’re not willing to provide us with hard facts such as, “yes, there are about 50 organizations out there that we want to help succeed.”
Mr. Leblanc: What I said to Senator Marshall, and I’ll repeat it, is that we’re happy to go back and share what we can in terms of assumptions. I don’t have those assumptions with me here.
[Translation]
Senator Forest: I guess that, when we decide which not-for-profit organizations are eligible, there will be criteria such as general content or regularity, depending on whether they publish once a year, once a month or on a weekly basis. Some media outlets are currently having difficulty in certain regions. Sometimes, one journalist keeps the media outlet afloat. In terms of a criterion of two journalists in a newsroom, we’re talking about a media outlet that conducts more business than a number of small local newspapers. I’m sure that, in terms of the criteria, if I create a newspaper to promote lawn bowling, it wouldn’t be eligible. However, if I consider a local newspaper in a community, which is published weekly and which has only one journalist, the threshold of two journalists constitutes a disadvantage for small local media outlets. Have you looked at this?
Mr. Leblanc: Thank you for the question. I think that’s a good point. I think that, in proposing this definition, the government is trying to strike a balance. I think that supporting local newspapers and organizations is important for the government. It’s about finding a reasonable threshold, in terms of the number of journalists, that takes into account the circumstances of small newspapers.
The government also finds that we’re talking about a significant amount of money. I think that we must still have a threshold. Otherwise, maybe bloggers or only people who post on a website could benefit from these support measures.
Perhaps my colleagues would like to add to my answer. The underlying principle is to find this balance.
Ms. Lavoie: I’d like to add that other programs have been set up with the Department of Canadian Heritage. This department has funds to support the media, such as the Canada Periodical Fund, which focuses on the smallest players. The choice to help these organizations may be different for larger players in relation to smaller players.
Senator Forest: Clearly, the criteria are the quantitative minimum, as in the case of two journalists in the organization. However, there are some important criteria. Who are the clients? Is it the community? Is it a special interest group? What type of news are we talking about? Are they editorial writers, or do they cover local events? A whole range of news items are journalistic in nature and have a specific and extremely clear purpose. These news items are the information tools of a small community. There’s a quantitative approach. However, I think that a qualitative approach must be taken to meet the needs of the community, regardless of the size, so that it can receive proper information.
Mr. Leblanc: Thank you. I’d add that the criterion is to regularly employ two journalists. The idea here is to take into account the circumstances. It’s not necessary to have two journalists every day of the year. Small organizations are the most likely to experience fluctuations and changes within the organization during the year. These circumstances must be taken into account.
Senator Forest: I imagine that the new committee will be able to fine-tune the eligibility criteria.
[English]
Senator Klyne: This is going back to Senator Eaton’s line of questioning.
I thought maybe this was to fortify the democracy of unbiased hard news, and I’m starting to lose my way on this one. When we talk about not-for-profit and that they are operating for some broad public purpose, it almost sounds like it’s drifting towards hard news, but that the charitable organizations could give money to that qualified donee, I get a little concerned about how some charitable organizations that receive money from certain sources may want to influence the agenda of an industry.
So I’m wondering how we circumvent that.
Mr. Leblanc: Thank you for the question. I think you raised an important point.
As Trevor explained, for each of the three measures, there will be a base requirement of being a qualifying Canadian journalism organization. Then for each of the three measures, there will be essentially a series of extra requirements. One of the extra requirements, recognizing that point, is that on an annual basis when we’re talking about the qualified donee measure, when we’re talking about the not-for-profit journalism organizations eligible to receive charitable donations from organizations and eligible to issue the donation receipts, they can receive no more than 20 per cent of their donations from any one person or a group of persons.
The idea there is to have some diversity of funding sources. I’ll stop there.
Senator Klyne: The answer begets a question, not a comment.
Give me an example — and you don’t need to name any publications — of one that is not-for-profit, operating for some broad public purpose and being under that qualified Canadian journalism organization that provides that hard news that would qualify for this.
Mr. Leblanc: We’re not in a position to talk about specific news organizations.
Senator Klyne: Just generally, Zebras Are Us, a not-for-profit providing a broad public conception.
Mr. Leblanc: What we’ve seen, for this measure, there has been some inspiration from what has happened in the states. You have news organizations in the United States. An example that comes to mind is ProPublica that have not-for-profit status and essentially have what is called 501(c)(3). It’s what they call their charitable status in the United States and which provides a wide range of news coverage on basically public interest stories.
Senator Klyne: That’s a not-for-profit situation?
Mr. Leblanc: That’s a not-for-profit situation. They receive —
Senator Klyne: — they would qualify.
Mr. Leblanc: That’s right. They are a not-for-profit organization.
Senator Klyne: I can see into the future.
The Chair: When you say it’s inspired from the states, I hope fake news is not inspired from the states.
Senator Andreychuk: I don’t know about the zebra comment, but I’m very concerned that Canada has been one of the countries that has staunchly talked about the freedom of the press. We know how many journalists have lost their lives. So we monitor and we fight back to say democracy is a free press, an independent judiciary. Here we are going to be setting up criteria by the government to get government funds.
In the countries that I’ve worked, survival for a lot of people to get their information meant they had to go to the government. And I watched how the original rules might have had good intentions. But we don’t know what’s going to happen down the line. Sometimes we look the other way and we wake up and find that there is a manipulation of that press.
I’m worried here that you’ve got criteria, you have to jump those, selection committees appointed by the government. We’re intruding on the freedom of the press. It may not be our intention. It’s the survival of the newspaper, but we’re going to be creating opportunities for others to come in and we may not really be helping those that we intended to help in the first place.
To me, it’s a very dangerous ground. It shouldn’t be in a tax credit. It should be wide open as a debate for Canadians, whether in fact this is the way to support a freer press, a press that’s struggling against bloggers and the new Internet systems, tweets and whatever else that you want. I think it’s a bigger national debate than a question tucked into a tax situation because we all want to encourage the survival of the press, whether it’s in a small town or elsewhere. But if we start on this road with these criteria, with government setting and interpreting that criteria, I think we’re on the wrong road.
What is the reaction, if any? If not, I’ll leave it to the politicians to decide. I fully understand your position.
Mr. Leblanc: Thank you. Those are very important and understandable concerns.
What we can do is point to what the government says in the budget, which reiterates what was said in the 2018 fall economic statements about how essential it is that this be arm’s length and independent.
It’s basically the two stages that I think both Trevor and Maude have touched on. The first is that there is an independent advisory committee drawing from the journalism sector in order to provide advice and basically to put some more meat around some of these concepts in terms of what’s meant by “original news content” or “general interest,” just to give examples. The second is to have, basically, an independent body that is doing the assessment — that’s basically determining. In terms of determining qualifying Canadian journalism organizations, that must involve someone else.
For the purpose of the qualified donee measure, the CRA as an institution is checking the other boxes that are more routine, making sure you’re not-for-profit, that you’re not receiving too many donations from any one source, that you keep proper books and records, and so on.
Your concern is certainly heard.
Senator Andreychuk: Press freedom cannot be judged by only those within the press. Then you’re already, by definition, restricting and identifying what you think is acceptable rather than allowing for free expression in a country.
Senator Moodie: My question is taking Senator Andreychuk’s question a bit further and trying to understand the whole need for verification. It’s going to become quite cumbersome, I think, because who is going to decide? Is it in the moment? Are you going to have lists? This is potentially for the tax credit for digital subscriptions, and quite a lot of people are applying for this.
What’s the workload assessment here? I’m trying to understand how this is going to be accomplished in real life, come tax time.
Mr. Leblanc: Thank you for the question. There are two parts of that. Let’s just take the digital subscription measure.
There are two parts. There will be the to-be-determined body. It will have to be a subscription with a publication that’s a qualifying Canadian journalism organization, so that list will be determined. When organizations qualify, they will help their subscribers know that you’re signing up for this digital subscription and that it’s eligible.
Mr. McGowan: Just to add to that, the rules themselves allow for a publication of the list of qualifying journalism organizations for the purposes of the digital tax credit. It would allow for, say, the CRA to have a list stating the organizations that qualify for the digital tax credit. You can just go to that list and see if it would qualify.
In addition to, I’m sure that qualifying digital subscriptions will advertise, but there would be that secondary list as well, and that’s provided for in the rules.
Senator Moodie: Just to carry it to the next level. How do we make sure that the people who actually end up on this list are bona fide Canadian “true news” — not to use the other kind of news? All expectations are that it is going to be an increasing problem moving forward.
Mr. McGowan: There are a couple of different verification points that are relevant to the question.
Building on a lot of the excellent questions we’ve had, there are a few different sources upon which this measure has been built. One, of course, will be the output of the independent advisory panel that will describe eligibility criteria for the purposes of the designation and that will provide, perhaps, additional information in respect of the criteria enumerated in the bill. And that is to be established on an arm’s-length basis. That would feed into the designation process. Whether you’re designated is, of course, a binary condition the Canada Revenue Agency could simply ascertain.
There’s also the normal enforcement and verification that the Canada Revenue Agency would do in its administration of the tax system. I mentioned the different sources of this measure — where it was pulled from. Some of it is new and some of it will relate to the advisory panel, but some of it is based upon the existing rules for Canadian newspapers that currently exist in the Income Tax Act. Part of how this measure was developed was with that in mind.
Currently, the Canada Revenue Agency applies tests. These are in section 19 of the Income Tax Act relating to Canadian newspapers, which is defined in subsection 19(5), I believe. They do their verification work in order to determine if you qualify for this measure, as they do for every measure in the Income Tax Act.
The rules relating to, for example, the residency of a corporation can be ascertained by the Canada Revenue Agency. The shareholdings in the case of a corporation are relevant for a number of different purposes. Those are the sorts of things the Canada Revenue Agency often does in its normal enforcement measures.
It’s within that broader context that this measure has been put together, with the mind to help ensure this is something the CRA can verify for the parts that, of course, they would be tasked with looking at.
The Chair: Thank you.
Senator Marshall: The two bodies that you mentioned earlier, that are going to oversee these three new tax measures — I think there’s an independent panel of experts and an independent administrative body — have they been established already?
Mr. McGowan: No, they have not.
Senator Marshall: Can you tell us how the members are going to be selected?
Mr. McGowan: That has not yet been announced by the government. Unfortunately, we don’t have anything additional we can add.
Senator Marshall: My last question is around the mandates. Are the formal mandates of the panel and the administrative body — do we have mandates established for them yet?
Mr. McGowan: As I said, nothing has been announced yet by the government on the particulars of the advisory panel.
I would point out that in paragraph (b) of the proposed definition of “qualified Canadian journalism organization,” there is the mandate that in order to be a “qualified Canadian journalism organization,” it must be designated as such for the purposes of that definition by the body that’s prescribed for that purpose.
Senator Marshall: By the independent panel of experts?
Mr. McGowan: There’s the advisory panel that would come first to provide advice on how the measures should be done, and then there would be a body that would have the mandate of designating organizations for the purposes of this measure. I think that’s paragraph (b) of the proposed definition of “qualified Canadian journalism organization” in proposed subclause 248(1).
Senator Marshall: Thank you.
Senator Klyne: I have three quick questions.
With the refundable labour tax credit and the other one, which is the donee status, can one of those apply for both of these?
Mr. McGowan: Yes, absolutely. It would be possible for an organization to qualify for the qualified donee measure and not qualify for the other one. It would likewise be so for the refundable lake tax credit, because they have different requirements. It would also be possible for a qualified donee to be entitled to the refundable labour tax credit.
Senator Klyne: That’s number one.
In this one about the labour tax credit, if they fall under the Broadcasting Act, they would not qualify. Let’s say the journalists are producing for a newspaper, but there’s a newspaper dot-com part of that. Because it’s being “telecommunicated” — it’s not a radio wave but the newspaper dot-com is still going through a communication link — does that preclude?
Mr. McGowan: Do I understand correctly that you are asking about digital publication of written works?
Senator Klyne: Right.
Mr. McGowan: The intention of the legislation is that you could still qualify for the labour tax credit if your written journalism work is being disseminated electronically and it’s not purely for print. It could also apply to written online journalism.
Senator Klyne: Okay, good.
If there was a network of publications under one umbrella, because there are separate entities and, say, 10 newsrooms with four journalists each, could all 10 different publications apply?
Mr. McGowan: There are a few requirements that touch on that question and each would need to be satisfied in order to be eligible for the measure.
First and, perhaps, most importantly, the individual would have to be an employee of the relevant journalism organization. It would not apply to freelancers, such as somebody working for 10 different organizations on an independent contractor basis. They would have to be an employee. They would have to work, on average, a minimum of 26 hours per week throughout the relevant portion of the taxation year for the organization. They would also have to be employed for at least 40 consecutive weeks overlapping with the relevant period.
There are those kinds of requirements that would need to be met in order for it to apply. Of course, if you are an employee of two different organizations and work 30 hours a week for each, there is that theoretical possibility, but you start running into the practical limits.
Senator Klyne: Okay, thank you.
Senator Pratte: As far as the refundable labour tax credit, it is written here in the department’s explanations that the eligible expenses will be reduced by the amount of any government or other assistance received in the taxation year with respect to the employee.
Is there any relationship between this and the qualified donee status, that is, the fiscal cost of the donations that are received by a news organization? Would that be deducted from the amount received under the other program?
Ms. Lavoie: It would be assistance received from a government. If the expense was already subsidized by the government, that portion would not qualify for the credit.
Senator Pratte: So there is no link between the qualified donee status and the labour tax credit program?
Ms. Lavoie: Not for this specific aspect.
Senator Pratte: Thank you.
The Chair: Before we conclude, I have a question, and this will complete Part 1(f), honourable senators.
[Translation]
First, this initiative is very good. I’m specifically thinking of the Association de la presse francophone, which has a national presence. I’d like to congratulate you on this.
[English]
To follow up, as a number of people or organizations, when you look at News Media Canada, they have over 800 trusted titles across Canada, so those are some of the associations that can qualify.
[Translation]
The Association de la presse francophone also includes Quebec, and several hundred associations can become members of this organization.
When Mr. Leblanc appeared before the committee, he was asked about your estimate that $500 million would be invested.
On that note, we would like some clarifications. You could send us some further information through the clerk. According to some statistics, there are several hundred francophone associations in Canada. These include News Media Canada, which also represents over 800 titles in Canada’s provinces and territories. I want some clarifications on this matter.
I’ll now ask my only question, and it will be specific.
With regard to the creation of the advisory committees that will administer the program, can you confirm that Canada’s regions will be represented in each executive office, including the Atlantic provinces, Quebec, Ontario, Western Canada, and Canada’s northern territories?
Ms. Lavoie: Since the government has yet to announce the details of how the committees will be created, unfortunately, we can’t answer this question.
The Chair: Can you pass this question on to the government?
Mr. McGowan: Yes, of course.
The Chair: Okay. Thank you.
[English]
This concludes Part 1(f). Honourable senators, we will be back in this room for 1:30.
(The committee adjourned. ).