THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
OTTAWA, Wednesday, May 31, 2023
The Standing Senate Committee on National Finance met with videoconference this day at 6:49 p.m. [ET] to examine the subject matter of all of Bill C-47, An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023.
Senator Percy Mockler (Chair) in the chair.
The Chair: I wish to welcome all of the senators as well as Canadians across the country who are watching us on sencanada.ca.
[Translation]
My name is Percy Mockler, senator from New Brunswick and Chair of the Standing Senate Committee on National Finance.
I would now like to ask my colleagues to introduce themselves.
Senator Forest: Good evening, everyone. My name is Éric Forest and I am a senator from the Gulf senatorial division in Quebec.
Senator Gignac: Clément Gignac, senator from Quebec.
Senator Loffreda: Good evening and welcome. Senator Tony Loffreda from Montreal, Quebec.
Senator Moncion: Good evening. Lucie Moncion from Ontario.
[English]
Senator Duncan: Good evening, and welcome. My name is Pat Duncan. I’m a senator from the Yukon.
Senator Pate: I am Kim Pate, and I live here on the unceded unsurrendered territory of the Algonquin Anishinaabe.
Senator Marshall: I’m Elizabeth Marshall from Newfoundland and Labrador.
Senator Smith: Larry Smith, Quebec.
[Translation]
Senator Dagenais: Jean-Guy Dagenais from Quebec.
The Chair: Thank you, honourable senators.
[English]
Today, we continue our study of the subject matter of Bill C-47, An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023. We welcome the following witnesses: Daniel Brock, Policy Advisor, Coalition for Responsible Digital Asset Mining; Tamara Rozansky, Tax Advisor, Coalition for Responsible Digital Asset Mining; Bernard Brun, Vice President, Desjardins Group; André Huot, Vice President, Taxation, Desjardins Group; Michael Hatch, Vice President, Government Relations, Canadian Credit Union Association; and Rachel Barry, National Advocacy Lead, Canadian Credit Union Association.
Witnesses, thank you very much for accepting our invitation to appear at the National Finance Committee of the Senate of Canada. I understand that each association will make a five‑minute presentation before we proceed to questions from the senators. I will now recognize Mr. Daniel Brock of the Coalition for Responsible Digital Asset Mining. Mr. Brock, you have the floor.
Daniel Brock, Policy Advisor, Coalition for Responsible Digital Asset Mining, Digital Asset Mining Coalition: Thank you, chair and committee members, for having us here to speak with you today.
In addition to being a policy advisor for the coalition, I’m a partner at the Canadian law firm Fasken. I’m joined by Tamara Rozansky, an indirect tax partner with Deloitte Canada. Together, we are advising an industry coalition representing more than 23 companies and organizations, all participating in Canada’s growing digital assets and blockchain ecosystem.
The coalition came together last spring to address a surprise legislative proposal published by the Department of Finance in February 2022 that would increase our members’ costs of carrying on business in Canada by 5% to 15%. It is regarding that proposal as it appears in Bill C-47 that we are here to speak with you today.
In 2017, Canadians might have been using computers in their basement or garage to mine for bitcoin. Today, almost all digital asset mining is big business. Companies are using industrial‑scale computing to verify and secure transactions that occur on a public blockchain.
At today’s market rate, the transaction fees and subsidy for adding a single block to the bitcoin network has a value of almost $200,000. More than 1,000 blocks get added to the bitcoin blockchain every week. That’s more than $200 million in potential revenue per week for the mining pool companies that mine for bitcoin.
There are, however, no major mining pool companies in Canada. All are non-residents of Canada, based primarily in the U.S., Asia and Europe. Canada’s role in this emerging industry is not in mining for bitcoin; instead, Canadians are the suppliers of high-performance computing power that makes bitcoin mining possible. Canadian companies take advantage of our cooler climate, our skilled workforce and our excess hydroelectric energy to produce and export clean computing power as a commodity, like wheat or precious metals. Canadian computing companies are quickly becoming industry leaders in the supply of clean computing power that international blockchain mining‑pool companies want.
Since 2018, this high-performance computing sector has brought in more than $2 billion in revenue to Canada. It has invested $1.5 billion in the rural and resource communities in which they operate. It has paid millions of dollars in corporate, property and payroll taxes in Canada. It has also created 1,500 well-paying high-tech jobs in those communities. The average age of employees in most of these companies is under 35.
Our main concern with the Department of Finance’s proposal on crypto-asset mining is that this early success and the potential for future growth in Canada is being put at risk. There are several problems with the proposed GST changes. Let me highlight three.
First, the proposed subclause 188.2(1) of the Excise Tax Act declares that a Canadian company that, (a) allows its computing resources to be used by foreign, non-resident mining pool companies for crypto-asset mining, and (b) shares in the proceeds of that mining is not engaged in “commercial activity” and will not be able to receive input tax credits.
By contrast, all other companies that allow their computing resources to be used by non-residents are entitled to input tax credits, regardless of how that computing power is used or how their fees are calculated.
Second, by denying input tax credits to Canadian computing companies, these new rules make them less competitive in the international marketplace. The GST replaced the old federal sales tax in 1991 specifically to remove Canadian sales taxes as an input cost for Canadian businesses. The GST is to encourage both investment in Canada and Canadian exports, and to make our goods and services more competitive in international markets.
The proposed subclause 188.2(1) does the exact opposite.
Third, the GST proposal creates a competitive disadvantage for computing companies across Canada, depending upon the province in which they operate. The GST proposal creates an incentive for companies operating, for example, in Quebec or Newfoundland, where the embedded sales tax cost will be 15%, to move their operations to Alberta, where the sales tax cost will be only 5% — or outside of Canada altogether. The GST should never lead to this type competitive imbalance for businesses within Canada.
So what is the solution?
The industry feels that there is a simple solution that is consistent with good GST policy and would confirm in legislation what Finance officials have conveyed to the coalition companies in our many meetings. Working with your colleagues in the House Standing Committee on Finance, we proposed an amendment to Bill C-47 that would add a clear and unambiguous exception to the new rules. That amendment was considered by the House standing committee this past Monday and was narrowly rejected by a vote of 6-5.
We are grateful to have had the opportunity to engage in this important legislative process. We commend and thank the members of the Standing Committee on Finance for their consideration of our concerns and our proposed amendment.
We are not here today to ask this Senate committee to revisit our amendment proposal. Instead, as you consider Bill C-47, clause by clause, we ask this committee to clarify with officials of the Department of Finance how the new GST rules will be applied and what constitutes “sharing” of a crypto-asset payment. If the answer is “that depends upon the terms of the contract,” then please ask why the contractual terms or the method of calculating payment is relevant.
There are approximately $150 million of outstanding input tax credit claims from this new industry sitting with the CRA since 2018. Those funds, and the future of the industry in Canada, will turn upon the answers provided by Finance to this committee.
We look forward to your questions and to the discussion.
The Chair: Thank you, Mr. Brock.
[Translation]
Mr. Brun and Mr. Huot from the Desjardins Group now have the floor.
Bernard Brun, Vice President, Government Relations, Desjardins Group: Thank you very much for inviting the Desjardins Group to appear before the committee today. My name is Bernard Brun and I am responsible for Government Relations at the Desjardins Group. I am here with André Huot, Vice President, Taxation, to talk to you about an issue that particularly affects us.
First, I would like to note the unique role of the Desjardins Group in Canada’s financial ecosystem. With approximately $400 billion in assets, the Desjardins Group is the largest financial cooperative in Canada, the largest in North America and the fifth largest in the world.
To meet the needs of 7.5 million members and clients, the Desjardins Group offers a full range of financial products and services through its vast network of points of service, virtual platforms and branches across Canada.
We operate in all financial fields, including personal and business services, wealth management, life and health insurance, liability insurance and international cooperation.
In the field of credit cards, the Desjardins Group is a very important player and is the fourth-largest credit card issuer in Canada according to data available at the end of 2022.
For the 2022 fiscal year, our financial results allowed us to contribute over half a million dollars, or $518 million, and redistribute it to our members, and to the community, consisting of dividends, sponsorships, donations and scholarships.
Our position therefore gives us a particular view and allows us to bring a different perspective to many aspects under consideration, including tax policy.
As you know, the last federal budget contained several announcements, initiatives and proposed measures. One involved a retroactive amendment to the Excise Tax Act.
Today, our comments will be primarily related to that proposal, which can be found specifically in clauses 114 to 116 of Bill C-47. The retroactive nature of the proposed measure comes as a surprise to the Desjardins Group and it will have significant impacts and consequences, not only financially, but also in terms of the predictability of government measures.
In this case, retroactivity seems to us in no way justified and comes at the expense of what would be an appropriate degree of certainty, an essential component of the stability of our financial system.
This approach is all the more surprising, and even worrying, in a particularly difficult and volatile economic context. The predictability of legislative measures is particularly important to the stability of the financial system.
Desjardins Group fully recognizes the government’s right to legislate in this area. On the other hand, in the current circumstances — which my colleague will discuss later — the text of Bill C-47, as it is worded with retroactive effect, is not only inadequate, in our opinion, but also harmful beyond any expected benefit.
On that note, I give my colleague the floor.
André Huot, Vice President, Taxation, Desjardins Group: Good evening, everyone.
Retroactive application of tax legislation should be done sparingly and only as a last resort, particularly when a court has ruled in the past in favour of a taxpayer on a disputed issue.
Otherwise, the essential role of the courts in administering our tax system would be greatly diminished.
Despite all drafting efforts, our tax laws sometimes contain grey and ambiguous areas. Even the best legal text could never foresee all applicable situations.
In that sense, legislation is imperfect and subject to interpretation. Before initiating lengthy and costly steps to challenge interpretations by tax authorities, taxpayers must have some certainty that the court’s decisions will be recognized and apply to past transactions in dispute. The amendments currently under consideration are to the detriment of that reasonable certainty sought by taxpayers and set out in our tax legislation.
After exhausting all recourse to the courts and in the event of a disagreement, the Department of Finance can still amend tax legislation. However, if it intends to do so, it must ensure that it does so quickly, or at least announce its intention to do so in a press release or as part of the budget process.
As for the changes under consideration today, the Canada Revenue Agency could also have appealed to the Supreme Court, which it did not do. The legislative amendments could also have been announced much earlier as part of the budgets tabled in 2021 and 2022, without necessarily waiting 26 months to inform taxpayers. That would have reduced the scope of the debate concerning retroactivity.
Although the CRA may, on occasion, challenge transactions with undesirable tax outcomes, the Department of Finance is sometimes called in as a preventive backup, to quickly stem the problems raised, and thus avoid challenges that can prove tedious and costly for the government.
Moreover, the 2015 and 2018 budgets contained examples of such measures. At the time, the government wanted to send a clear message of swift, forward-looking application to undo undesirable effects from a fiscal policy perspective.
In the current situation, we had no sign of the Department of Finance’s position concerning the taxable nature of payment card clearing services between the time of the CIBC case decision in January 2021, and the tabling of the budget on March 28 of this year.
On the contrary, in the weeks before the budget announcement, we even held discussions with the CRA about audits in this respect regarding our 2020 return.
Even large institutions like ours need a certain degree of predictability to function in an increasingly uncertain world.
Thank you for listening to us. We are available to answer your questions.
[English]
The Chair: I will now recognize Mr. Hatch.
[Translation]
Michael Hatch, Vice President, Government Relations, Canadian Credit Union Association: Thank you, senators, for inviting us this evening to discuss Bill C-47.
[English]
My name is Michael Hatch, and I am the Vice President of Government Relations for the Canadian Credit Union Association, also known as the CCUA. With me is my colleague Rachel Berry, National Advocacy Lead.
The CCUA, as many of you will know, represents 197 credit unions and caisses populaires outside of Quebec. Credit unions contribute nearly $7 billion to Canada’s economy by providing deposit, loan and wealth management services to more than 6 million Canadians. Collectively, credit unions and regional centres employ nearly 30,000 people and manage just under $300 billion in sector assets.
Credit unions, as you know, are cooperatives. In other words, the people who bank with credit unions are the same people who own them. Being accountable to our member owners as opposed to shareholders results in customer service that is second to none. We consistently rank at the very top of surveys of customer satisfaction in financial services.
For members of this committee representing rural areas, it is also important to note that in almost 400 communities across Canada, credit unions are the only in-person providers of financial services to households, consumers and small businesses.
CCUA was pleased to see included in Budget 2023 an updated definition of “credit union” in the Income Tax Act. The current definition is over 50 years old — 52, if I’m not mistaken — and does not reflect the reality of our members’ business in 2023. While this particular legislative amendment is not included in Bill C-47, which we’re here to discuss tonight, we do look forward to its inclusion in the fall budget implementation act, and we urge Finance, the government, and members of this committee to ensure its inclusion in BIA No. 2, which we expect in September or October 2023.
Regarding this committee’s current study of Bill C-47, we were pleased to see included in it protections to strengthen banks’ complaints handling regime. As strong corporate citizens, credit unions have relatively few complaints, but we have been proactively strengthening our complaints-handling process in recent years.
We welcome the government’s work on this, and we believe it to be an important component of consumer protection.
We would also like to share the concern of other organizations, including Desjardins, our partners here at the table, regarding clauses 114 to 116. It is our understanding, currently, that this retroactively amends the Excise Tax Act in a manner that would be detrimental to financial services in Canada.
To the extent that this amendment does represent a retroactive tax application, this would go against a largely accepted pillar of taxation, namely that changes be forward-looking and not retroactive.
This issue speaks to broader problems in the tax system and the need, in our view, for a more comprehensive review. The financial sector has evolved, as you will appreciate, significantly over the decades to suit ever-evolving consumer needs, and the tax system associated with it — no surprise — has not kept up. For example, many definitions are outdated or needlessly vague. The government has begun fixing this, such as with its recent update to the definition of “credit union” in the Income Tax Act, as I mentioned included in this year’s budget, which is a good step.
However, a much more comprehensive approach to tax reform is needed in our sector, and beyond, to modernize our tax laws so they better reflect the world of 2023.
Concluding, I’ll just state that our sector is strong and represents a key component of the Canadian financial system. In a market dominated by a small number of huge institutions, we credit unions as well as Desjardins, of course, in Quebec represent the only real competition that exists in Canada for consumers and businesses — particularly small businesses, where we have a very strong market share.
We appreciate the opportunity to discuss these and other important policy issues with the committee. We hope this feedback is helpful to the government and to the committee. I’m happy to take your questions. Thank you, Mr. Chair.
The Chair: Thank you very much to the witnesses for your statements. Now, honourable senators, we will have in the first round five minutes, and in the second round, three minutes each.
Senator Marshall: I’m going to start with Mr. Brun and Mr. Huot. I hope I pronounced your names correctly. We had a lot of discussion on those clauses, 114 to 116. Could you give us a little more background? I’m wondering if there was any consultation, or did this amendment come as a surprise to you.
One of the issues that the Finance officials raised with us when they were explaining the amendment to us is that they indicated that the financial institutions had actually collected this money, and therefore they had a windfall. I think that their view on that was that the windfall was there and maybe the Finance Department should have it rather than the financial institution. Can you speak to that?
My other question is: The government has budgeted $195 million in revenue as a result of this amendment. Are you able to tell us whether there’s a substantial amount there that affects your organization, if you’re willing to share that?
[Translation]
Mr. Huot: To answer your first question, the proposed amendment is a total surprise. The case law decision was rendered in January 2021 by the Federal Court of Appeal and there was no sign from the Department of Finance of possible amendments or an application other than the conclusions from the case law.
I am a member of associations of tax and accounting professionals. I had no indication of this. Nor have my colleagues, who are frequently consulted in accounting and law firms. For me, it comes as a complete surprise to learn that there will be a change and that it will be retroactive to 1991.
[English]
Senator Marshall: There is $195 million that the tax department thinks they’re going to collect. I’m curious exactly who they’re collecting the money from and how much? What is the financial impact on companies? Is that something that you can share with us?
Mr. Huot: Yes, I can share. My understanding is that $195 million represents GST revenue. If we talk only about GST, our share, if it’s accounted in the $195 million — I’m not sure about that — it would be $30 million. So we’re impacted for GST purposes by $30 million.
Senator Marshall: You think you will be impacted by $30 million. Thank you very much.
I’m going to move on now to the Credit Union Association, and you also mentioned clauses 114 to 116. Are you directly impacted by that, or is your concern with regard just to the retroactivity of the amendment?
Mr. Hatch: Thank you, senator. It’s more the latter. It’s more the principle of retroactivity. We have not yet been able to determine whether or not this will have an impact on the credit union sector outside of Quebec because most other credit unions apart from Desjardins don’t issue credit cards. So that’s where most of the hit will take place. It’s possible there will be some indirect impacts, but we just, frankly, became aware of this issue in the last little while when I believe the CBA brought it to this committee.
We’re in the process of consulting with our members to see what, if any, impact is going to result outside of Quebec. But, again, to reiterate, just the notion of retroactivity is problematic in general.
Senator Marshall: You were saying you are looking forward to the updated definition of “credit union,” and based on what you’re saying, I’m expecting to see that in the fall fiscal update bill. So does Division 33 or Division 37 of the bill have any impact on you? Are the deposits guaranteed, in the credit union, with deposit insurance?
Mr. Hatch: Yes, deposits are fully guaranteed at the provincial level across the credit union sector in Canada to varying levels depending on the province, to your last question. To your first question, the definition update is a separate issue to what my colleagues at Desjardins have brought to the table here. It’s an issue that we have been pushing for years, because the current definition as it exists today dates from 1971, which, of course, was a time when the sector looked very different than it does today. It only really acknowledges very sort of plain vanilla deposit loan revenue directly from members, which probably represented the majority of credit union revenue 52 years ago. But since then, we’ve had to evolve in order to continue to exist and diversify our revenue sources, and of course, the tax act hasn’t kept up. So what the Canada Revenue Agency, or the CRA, is doing is they’re going in and saying, in certain cases, okay, wait a second, credit union, that revenue that you made doing other things doesn’t fit this 50-year-old definition. That has negative tax consequences.
Our argument was that this makes no sense. If a credit union makes a dollar somewhere else, it’s still credit union revenue. Ultimately, Finance agreed with that, and we expect to see it in the fall budget bill.
Senator Marshall: Thank you.
[Translation]
Senator Forest: Thank you again for being here.
We hear clearly from you that you were never consulted. However, representatives from the Department of Finance told us unequivocally that they had held consultations following the 2021 ruling. They stated that the banks had been consulted. For their part, the Desjardins Group and the cooperative movement in general were not — I understand that you were never consulted.
Given our mandate, my question is this: In 2021, a Federal Court of Appeal judge ruled on the issue and stated that it was not taxable. Two budgets later, the government steps in — They must be applauded for their creativity because I remember that, concerning the excise tax on small alcohol producers and microbreweries, it was the first time a tax had been implemented that was automatically adjusted for inflation.
Have you ever seen a retroactive policy applied to the financial sector since you have been involved in this sector of economic activity? Is this the first time we are seeing such a policy?
Mr. Brun: With respect to consultation, as government relations officers who have closely monitored everything that is happening, we can tell you that there were no public consultations or calls. Was it done through other channels? My colleague could tell you if it was done in a particular way. What was covered? It certainly was not the case here.
I thank you for the reminder that Desjardins is not a bank. We are also not members of the Canadian Bankers Association. Sometimes it can be easy to simply approach the government through a large association. I believe that a special effort is needed. That is why we are there, why we’re making our presence felt and why we’re insisting on being part of these discussions. In fact, if there had been such discussions, we would have wanted to know about them. As far as we know, there have been none.
Mr. Huot: At the risk of repeating myself, this was a surprise. There were no consultations. I was not informed. No tax colleagues in my network of contacts across Canada mentioned being consulted on this amendment. Everyone I could consult told me that it was indeed a surprise.
As for whether this happens frequently, the good news is no, fortunately, it doesn’t. I would even say that, in general, taxation of financial institutions is quite complex and the Department of Finance works with industry associations before establishing certain new rules. The department may want to counter certain plans and, at those times, there may not be any consultations but, generally speaking, when the objective is to improve the situation, the industry is consulted.
Senator Forest: Beyond the financial impact of $30 million, the climate of uncertainty and unpredictability that this may cause, do you think there could be other impacts on a sector like yours, that is nonetheless fragile?
Mr. Huot: At Desjardins Group, we work in the interest of our members. As with any credit union, the members are the owners, and we work in their interest in preparing their income tax returns in the best way possible, while complying with the tax framework, applicable case law and interpretations by the Canada Revenue Agency.
So, in 2021, when I filed the 2020 income tax return, that is how I needed to think about it. Since the CIBC case ruling had come down, if I had not applied it, I would not have been doing my work correctly, I would not have been working in the interest of the Desjardins member and client.
Ultimately, a bill that applies retroactively creates a lot of uncertainty. As you probably know, certainty isn’t always a given in tax matters. As I said earlier, there are grey areas and ambiguity. We are used to dealing with those kinds of things.
However, when you change the rules of the game after the game is over, it’s not predictable and, in my opinion, not something desirable in our tax system.
Senator Forest: We have a mandate to analyze various bills and my question is this: I thought I understood that what really bothers you is the retroactive application of the law. Without that retroactivity, I conclude that you could live with the measure, which you consider objective and fair. Is that right?
Mr. Huot: The simple answer is yes. The Department of Finance is there to establish the level of tax revenue it needs and to define the rules for collecting it. We may disagree, but we would not be here today talking to you about this topic.
Senator Forest: The problem is their retroactive creativity.
Senator Gignac: Welcome to the witnesses on this beautiful summer evening. When Budget 2023 was tabled, to justify this retroactive measure, the Minister of Finance stated that it was always widely understood that the services provided by payment card network operators were excluded from the definition of “financial services” for GST purposes.
We understood your message when you said that between January 2021 and the tabling of Budget 2023, you did not receive any signal from the Department of Finance to indicate that all of this has been understood for a long time.
We know that the Canadian Imperial Bank of Commerce has taken legal action, but do you agree with that assertion? How are credit cards viewed from a regulatory standpoint? This evening we are discussing taxation, but is a credit card defined as an administrative service from a regulatory perspective?
My questions are for the representatives from the Desjardins Group.
Mr. Huot: I could not tell you if services rendered by the Visas of this world are considered to be financial services from a regulatory standpoint. I imagine they are, because they are not administrative services. As for the clarity of the definition of financial services, it is probably one of the greyest areas in the Excise Tax Act. It is a complex definition, so complex that there has been a lot of case law in recent years to determine whether or not it is a financial service. Sometimes taxpayers win, sometimes the Canada Revenue Agency wins.
Beginning in 2018, it was clear, following the first judgment in the CIBC case, that all of that was not necessarily so clear or defined. The Court of Appeal also confirmed that it was not a clear definition and overturned the trial decision.
So, I disagree that it has been known for a long time. You could say that it was known for a long time until 2021 but after that, I think the Court of Appeal delivered a clear message.
Senator Gignac: The CIBC took steps to challenge the decision before the Tax Court. Then, in 2021, it went before the Court of Appeal and won. Did the Desjardins Group also decide to take steps to challenge the interpretation with the Canada Revenue Agency? When did you initiate proceedings?
Mr. Huot: We took steps to obtain refunds because we understood that the financial institution paid taxes. Our efforts began in 2018, and there were others in 2019, 2020 and 2021.
Senator Gignac: In terms of the budget, the Department of Finance states that it will recover $200 million. In your opinion, how much has the Desjardins Group received as a result of that decision? Maybe you are in the claim process and have not received anything yet. What is the situation at the Desjardins Group?
Mr. Huot: We have not received anything yet in relation to those claims. Processing times at the CRA are quite long and some specifics of our file make them even longer.
Senator Gignac: You have not received anything so far?
Mr. Huot: No.
Senator Gignac: Maybe other institutions have received something, but you, on this beautiful 30-degree evening, are saying that you have not received anything yet. Is that what I understand?
Mr. Huot: No, we have not received anything. You understood correctly.
Senator Gignac: How do you explain the Department of Finance’s decision to not go to the Supreme Court? Proceedings ended at the Appeal Court and the Canada Revenue Agency began settling the cases of financial institutions. Do you see any reasons? It is quite surprising that the department did not go to the Supreme Court.
Mr. Huot: Yes, it is surprising to us too given the amounts in question and the length of the dispute. It’s important to understand that we’re talking about the right to appeal, and that this doesn’t mean that the court will agree to hear the appeal. It was also a surprise to me. I imagine that the Department of Justice lawyers found that the odds were not in their favour or that it was not important enough to go to the court, but that is just an assumption. I have no idea.
Senator Gignac: I understand that we are speculating, but if it was clear to everyone that it was an administrative service, not a financial service, I am a bit surprised that the Department of Finance did not go before the Supreme Court.
[English]
Senator Smith: Mr. Brock and Ms. Rozansky, we’ll try to get you involved and do a little bit of rapid-fire questioning here, if that’s okay with you.
The proposed changes to the treatment of crypto were floated last year by the federal government. In June of last year, the crypto industry argued that preventing these companies from accessing input credits would increase costs of digital asset mining from anywhere from five to fifteen. You mentioned that today.
Here are the questions: Do you have updated figures on the cost of the policy proposal on crypto-asset miners in Canada? How does the policy proposal compare with how other jurisdictions with similar value-added tax schemes are treating digital asset mining? Should this legislation pass, what impacts will have it on investment in the crypto-currency space in Canada? Will we see a big exodus of crypto-mining companies to other countries? Four, what type of consultation have you had with the government on a consistent basis? Is that good enough?
Mr. Brock: Between the two of us, we should be able to remember.
In no particular order, the impact on the industry of the tabling of this proposal in February 2022 created a chill across the entire industry. We were just entering a period of significant growth and investment in Canada. China had stopped its business there, and companies were looking for places, in particular, that had access to clean power. Canada was an attractive place to look to do this unique computing. When the announcement was made, the investment planning stopped. Bitfarms is one of the largest companies in this sector, and they’re based in Quebec. Since this legislation was tabled, they have opened two new computing facilities, both of them outside of Canada.
There was a billion-dollar project that was being developed in Newfoundland and Labrador that was stopped for not only the reasons of this tax proposal, but because of issues related to access to power in Newfoundland and Labrador. That project is now currently being developed in Texas.
Partially, the tax legislation has really created uncertainty for the industry and a chill on what the investment climate is going to be like for this industry.
These companies recognize that crypto-asset mining and the whole space is not uncontroversial; it is in the media, and people talk about it. There are a lot of legitimate regulatory questions that governments have. But the business, as it has emerged in Canada, is very specific to providing the computing power. They sell to companies that are outside of Canada.
While those other issues are relevant, this industry is really the engine of that.
I think I answered one of your questions.
Senator Smith: You’ve only got a short period of time in round one, so you’ve got to hustle.
Mr. Brock: Other jurisdictions are grappling with this. I think this legislation is new and not consistent with other jurisdictions, because they are struggling with how to manage this issue from a value-added point of view.
From your first question, the impact is the cost of the inputs — the taxes on the inputs. In Quebec, your input tax costs are close to 15%. That hasn’t changed since this announcement was made. The 15% tax that’s paid on inputs for companies in Quebec is unrecoverable when this legislation goes through. In Alberta, your unrecoverable tax is 5%. In Texas, there is no unrecoverable tax.
Senator Smith: There will be a movement of companies out?
Mr. Brock: The amendment that was tabled in the standing committee was done so by the Bloc Québécois and supported by the Conservatives. Quebec companies are very concerned about the competitive disadvantage that they’re at. Ironically, these companies use clean hydroelectric power to do their work, and they’re being incentivized to move to a jurisdiction that uses fossil fuels.
Tamara Rozansky, Tax Advisor, Coalition for Responsible Digital Asset Mining, Digital Asset Mining Coalition: I would just add that, like Mr. Brock mentioned, these are companies doing computing services. If they were to leave, that’s potentially closing the door to other high-powered computing services that they’re building the infrastructure for. It is not necessarily just crypto-asset mining, but many other elements — ChatGPT, AI and other things.
Senator Smith: If you could do anything, what exactly would you like from the government?
Mr. Brock: We wanted the amendment, but again, we’re not asking the Senate committee to move an amendment to Bill C-47. What would be helpful at this point, and what we’ve asked for repeatedly of Finance officials, is to explain clearly before a committee like this on the record how these rules are expected to be applied. They have said at this committee and others that most of the industries are excluded: “There is an exception in here; most of you are excluded.” But there is no clarity around whether you are excluded or not.
Absent any clarity and the use of the definition of “sharing of mining payments,” a concept of sharing that doesn’t exist in the Excise Tax Act in any other place, is hugely problematic for companies.
The concern is that this is being punted to the CRA to do audits, and we will have to wait for the auditors to decide how they’re going to apply this unclear law.
Senator Smith: I’m getting heat under the table, because my boss is telling me that my time is up.
The Chair: I’ll put you down for the second round, senator.
Senator Duncan: I’m going to cede my time and put it in the pool for these questions. This is a very interesting discussion, and my colleagues are more learned than I am on this.
The Chair: We will finish with the first round, and we’ll add that time to the second round. Thank you.
[Translation]
Senator Loffreda, you are the bill’s sponsor, and the floor is yours.
Senator Loffreda: I have two questions, one of which is for the Desjardins Group representatives.
[English]
My first question is for Mr. Brock. It continues where Senator Smith left off. I think I believe the major issue is a lack of understanding of the industry by the government. Even among us senators, when we do discuss it, it’s not an easy industry to understand. Mining is driven by economic incentives, but the economics of mining can be complex. We see that through the amendments that are being proposed here.
Can we say that the existing weaknesses highlighted in the proposed amendments can be attributed to a lack of understanding and inadequate consultation within the industry? How can that be corrected? If so, this evening, can you provide further insights that claim to clarify specifics and specific elements of the crypto industry, shedding light on its operations and addressing these concerns?
I’m certain that by enhancing understanding in those areas, we can foster a better comprehension of the industry as a whole and work toward resolving the identified challenges. It’s very difficult for us to do so. You have a proposed amendment, but we have to concur on it, even to tell the government to consult that amendment. If we don’t understand it, how can we do that?
Mr. Brock: I’m mindful you have a second question. I’ll try to be concise.
Senator Loffreda: I’ll have a second round.
[Translation]
My question for the second round is for the Desjardins Group representatives; be prepared to answer my question.
[English]
Mr. Brock: Let me start by —
Senator Loffreda: Take the time you need. This is important, so take the time you need.
Mr. Brock: We have immense respect for the individuals who work in the tax policy and sales tax division at the Department of Finance. We work with them on this.
Part of the issue here is that there has been a lack of understanding about the contractual relationships that underpin this industry as it relates to the industry in Canada. In answer to Senator Smith’s question, which you brought up again, around what kinds of consultations we have had, this law was tabled in February 2022. At that time, Finance officials had not spoken with a single company in Canada that does this, as far as we know. I think the thought was that there was a lack of clarity around who is really in this industry and who is doing what. There was no industry association, which is why we created a coalition. There were, however, five to seven publicly traded and listed companies in this space. It’s not like they were hiding or anything, but that consultation didn’t happen.
We feel that the bill as originally tabled reflected a misunderstanding.
The thought by Finance officials was that these companies in Canada were mining for bitcoin. By mining for bitcoin, they were involved in activity that is difficult to regulate from a GST point of view, and they felt that the sensible solution to that was to remove the industry entirely from the GST, which very rarely happens and has not happened in any sector of the economy. That was their choice.
It was only after it was tabled and the coalition was created that there was consultation. There were meetings, and there was an explanation of how the industry works and how the Canadian industry works. Basically, these Canadian companies that have this computing power sell that power to identifiable corporations that are not resident of Canada. There are a variety of different payment methods by which they are compensated, but they are paid for their computing services.
Finance officials were saying that they didn’t know who is actually using the network. We couldn’t identify the residency of people using the network. That is the problem. Because we can’t identify the residency of the people using the network, we can’t identify the recipient of the supply.
But we know who the recipients of the Canadian-supplied services are. They are the companies mining for bitcoin. Those companies are not resident in Canada. In fact, some of the companies buy Canadian computing services and sell on that service as an aftermarket to other companies.
From a GST perspective, it’s very simple: There is a supply, there is an identifiable recipient and that recipient is not resident in Canada. Therefore, the supply is GST-able but the GST rate is zero. Again, pursuant to my earlier remarks, that’s to encourage Canadian businesses to create value, create exports, to grow and be competitive in the international marketplace, to bring revenue back to Canada, to pay corporate and other taxes.
What this law does is it turns these companies into end consumers in Canada and says that you can’t recover your GST. We think that’s bad GST policy and certainly bad for the industry. Given the future of this industry, we’re at the beginning of this. The kind of computing power used today for this sector is likely to be eclipsed by the kind of computing power that will be required globally for the digital world to come.
Canada is uniquely positioned. We’re perhaps in the best position to supply clean, zero-emission computing power to the world. Right out of the gate this law says, “Well, because we don’t understand you, we’re just taking you out of the system, and you have to absorb the input tax costs.” We think that’s a mistake.
Senator Loffreda: It’s a lack of understanding. To put it in simple terms — I have heard this before in your industry — it’s like selling to the TSX, but the TSX has foreign companies within the listing. Is that right?
Mr. Brock: Yes. If you were selling computer services to the TSX or the New York Stock Exchange, which is better because that would be a foreign recipient of the supply, this law is tantamount to saying, “Unless you can identify who is trading on the New York Stock Exchange, and the residency of the people trading on the New York Stock Exchange, we’re not going to allow you to claim your input tax credits.”
That makes no sense. That wouldn’t happen. You’re just supplying computing services to a recognized foreign entity. That’s what this industry is doing, but doing in a very new and emerging space, publicly distributed ledgers. Bitcoin is the dominant one today. The vast majority of the value that is generated is on that network. We’re just at the beginning of that. But the analogy is a good one.
Senator Loffreda: So it will affect growth of the industry in Canada. Competitively, why didn’t the government consult and verify best practices around the world? Although it is a new industry, it is global at this point in time.
Mr. Brock: I can’t actually speak to what the department may or may not have done in terms of consulting with their colleagues in other jurisdictions. I can’t speak to that.
As I said, our understanding of how this industry is regulated, from a tax point of view, in other VAT jurisdictions varies. In some jurisdictions, we understand that the input tax credits are permitted; in other jurisdictions, they are not. I think the U.K. does not.
Senator Loffreda: Every country is different.
Mr. Brock: The U.K. can do that. The U.K. is not a growth sector for the computing services. They’re not harming their own businesses and economy by taking that position.
We are a destination for this type of infrastructure, this type of investment. All we’re doing is hurting our competitiveness by not allowing them to claim, as every other business in Canada can do, input tax credits.
Senator Loffreda: Thank you.
[Translation]
Senator Dagenais: My first question is for Mr. Huot. First, since I am a Desjardins member, you raise some concerns for me.
That said, I’d like to come back to the issue of the retroactive tax measure for cards in the budget. An official we heard from in committee replied that the amounts in question were not very significant for the institutions. I imagine that, for her, $30 million is not so important, but you are saying that the tax will cost $30 million because of the retroactivity. Will there be an impact on actual users? If so, how?
Mr. Huot: I would say that as far as the past is concerned, there will be no impact. Those revenues were not posted. Everything we are discussing today was not posted, because there was uncertainty as to whether we would receive those amounts. There will be no impact on users. In the future, there will be no reduction in fees because we have just been told that it is a taxable supply. It’s as though we were in the past; there will be no savings in the future for users.
Senator Dagenais: You told my colleagues that the matter had already been debated before the courts. Am I to understand that we are facing a new possibility of challenging this provision of the law? Do you have options for challenging the law? I understand that you mentioned it, but I would like to come back to it.
Mr. Huot: When we have a legislative provision that applies retroactively to 1991, there is no way of challenging it. I am not a lawyer. I do not want to comment on law. I cannot say, from a constitutional standpoint, whether retroactivity can be challenged, but from a tax perspective, I have no opportunity, so if the proposed clauses are accepted as they stand, it is over. End of story. It will be taxable in the future and nothing will be received by any Canadian taxpayers for the past; even those who obtained checks will be required to return them based on the legislative text that was tabled.
Senator Dagenais: Mr. Brock, you spoke about the impact of taxation on transactions for non-residents. Could you explain why non-residents choose to conduct mining transactions in Canada rather than elsewhere? Why not in their country of residence? What are the benefits? Why should they be treated differently than Canadian residents from a taxation standpoint? Finally, do they pay taxes in their country of residence?
[English]
Mr. Brock: That’s correct. I would say the companies that are doing the mining are based in the United States, Asia and in Europe. As to the reasons for not being based in Canada, it is not entirely clear to me that there are no mining pool operators in Canada. The way the industry has evolved, there are a handful of companies that are doing this, and they have the locations they have, but they draw computing power from around the world. They’re taking computing power from Texas, from within the United States, from South America, from Europe, from Kazakhstan, and they’re taking power from Canada.
What’s attractive about Canada to these companies — many of which themselves are publicly listed — is Canada is a very stable jurisdiction. It’s a very stable political jurisdiction. There is an effective rule of law and a strong governance culture. Also, we’re blessed with an abundance of clean power.
Increasingly, the people investing in this network are looking at the environmental impact of digital asset mining. One of the points of criticism of this industry that’s growing is climate change, the CO2 emissions impact of this intense computing. When they look around for clean computing power, Canada stands out as an opportunity.
Every single bitcoin that gets produced on the bitcoin network from Canadian power is a green bitcoin. It hasn’t produced GHG emissions. The same cannot be said of the power coming from Texas or other jurisdictions.
There is no real taxation reason why they’re attracted to Canada as a supplier of computing services, but generally speaking, as the industry matures and wants to become more accepted and more mainstream, Canada is an attractive jurisdiction in which to do business.
[Translation]
Ms. Rozansky: The logic behind an exported taxable supply that is tax-free or zero-rated can be explained like this: When it is taken to another country, there is a potential obligation to assess taxes in the country in question.
[English]
That means that there will be a potential for double taxation in the given situation because there is now an embedded tax that comes in, and then the service is exported and another tax might apply on top of it, which is problematic from an international tax perspective.
[Translation]
Senator Dagenais: To follow up on Senator Smith’s question, do you get the impression that the government is trying to slow the development of cryptocurrency transactions, given the uncertainty involved in that industry?
[English]
Mr. Brock: That’s a difficult question because what the officials from Finance have told us is, “We have nothing against your industry. This has nothing to do with crypto. We’re trying to find the right application of the Excise Tax Act, of the GST, to your industry.” But it’s difficult not to feel as though you’re being singled out when your entire industry is taken out of the mainstay of the GST and put in an obscure part of the GST, of the Excise Tax Act, that deals with lottery winnings and other exceptional circumstances.
The effect of doing that is to say, “You’re removed from the GST. Your business is no longer deemed to be a commercial activity, and you can’t claim input tax credits.”
The consequences are severe on the industry. Given the broader debate and discussions that are happening in Canada and abroad, it’s hard not to feel as though this is part of a concern being exercised by the government about where this industry is going. We have, in fact, suggested to Finance and to the minister and to the Minister of Innovation, Science and Economic Development Canada, that there really is a need for the broader framework for the government from a regulatory point of view for the entire industry. We would applaud that. In fact, we’ve encouraged it and suggested it.
What is happening here is that this is a kind of one-off. It is the wrong step and it is the first step in what should be a broader understanding, a re-evaluation of the potential benefits to the economy of this industry.
Senator Pate: Thank you to all the witnesses. My question is for the coalition. One of the issues that Canada is also notorious for is money laundering. It’s not in the most recent report, but in June of 2015, the Senate Banking Committee released a report reviewing the rising use of crypto-currency and crypto-assets and recognized that the use of crypto-assets heightens the risk of tax evasion or avoidance because digital currency transactions are difficult to trace, and crypto-currencies, such as bitcoin, are often anonymous — or maybe always anonymous? You can correct me on that.
The issue of tax avoidance is significant. We know that during 2021, compared to pre-pandemic averages, tax avoidance nearly doubled in Canada, costing the Canadian public some $30 billion. Tax avoidance harms the economy by depriving the country of funds needed for essential services such as health care, education and infrastructure, and instead places the burden on those who have the least to fund these services.
What mechanisms do you suggest could be adopted to combat tax avoidance practices, particularly among crypto-currency users and businesses? Would the Digital Asset Mining Coalition, your coalition, support the adoption of such measures to combat tax avoidance?
Mr. Brock: In a sense, your question deals with that part of the industry that’s a little bit outside of what our industry is on, but I would say this. Every single company in this coalition would welcome the development of rules that would remedy the associated problems that have been identified by governments on the use of crypto-currencies. Whether it’s money laundering or other criminal activity, again, these companies are publicly traded companies. They want nothing to do with criminal activity. They want the network to have nothing to do with that type of activity.
That approach, a sort of thoughtful, comprehensive approach to regulation, is something that the companies in this coalition would absolutely welcome.
The other thing about removing these companies from the tax system — and Ms. Rozansky may be able to comment on this, too, but when you register for tax purposes and you’re claiming input tax credits, everything is transparent. The government knows exactly what your business is and what you’re doing and the types of claims you’re making on your business.
By removing all of this from the tax system and discouraging people from making these sorts of claims for input tax credits — I just wonder whether inadvertently you’re inviting people not to be transparent about their businesses. If you’re not pursuing input tax credits, why be transparent about the operation of your business and what you’re doing?
I would like to think that having this industry treated like any other industry for GST purposes would actually encourage and create more opportunities for oversight and regulation, rather than less.
Senator Pate: One measure that’s certainly been looked at in terms of tax avoidance is the whole issue of minimum taxation on book profits. Book profits are, as you know, what corporations use to report to their shareholders, which is often not the same amount that is reported to Canada Revenue Agency. The U.S. recently enacted a minimum 15% tax on book profits as part of their Inflation Reduction Act to help solve problems associated with tax avoidance. Would your organization support such a move here in Canada?
Mr. Brock: We haven’t considered and discussed that as a coalition, so I honestly cannot tell you what the position of the companies would be on something like that.
The implementation of a surtax, effectively, on the industry in the United States is a public policy decision taken by the U.S. government to meet their circumstances. In a way, it creates a competitive advantage for Canadian companies that won’t have that same sort of tax burden put on it.
Again, there are multiple billions of dollars to be earned by this industry. A healthy industry, a mining industry, in Canada means that those revenues accrue to Canada. The revenue that generates goes to taxes, corporate taxes, payroll taxes, employee taxes. My general sense is that Canada should be looking at ways to grow this industry, to be able to increase its contribution to the Canadian economy, not decrease it.
In respect to your specific question, I simply can’t provide an answer because the coalition hasn’t considered that.
Senator Moncion: I have a question first for you, Mr. Brock. You said in your remarks that, instead of asking for an amendment, there is a question to be asked of Finance to clarify how the GST will be applied and how it will be relevant. Now, with the answer they provide, where is that going to get you? You’ll get the answer, but where is that going to get you on this Bill C-47?
Mr. Brock: I’ll let Ms. Rozansky deal with the specifics of what we might be asking for, but what it would do is provide clarity on the intent of the Department of Finance and the government in enacting the legislation. The ultimate job of applying the legislation and enforcing the legislation belongs to the Canada Revenue Agency, but a clear statement of intent by the government would be very helpful to the industry in its engagement with CRA on how it ultimately enforces the law.
Our amendment would have put the question to bed. It would have made it very clear that companies providing computing services to non-resident companies are identifiable. They would be treated like any other business. We were not successful with the standing committee on having that amendment adopted. Our fallback position is, to the extent we can, to get the Department of Finance officials to articulate on the record, the intent. That, we believe, would simply just be helpful to us in what we expect to be a continuing engagement with the Canada Revenue Agency.
Do you want to talk to the specifics?
Ms. Rozansky: I’m happy to. Very quickly, on the proposed legislation, there is an exclusion to that legislation when a particular person rendering the service is not part of a mining group. The difficulty there is the definition of mining group talks about those that — and I have the exact wording — “share mining payments in respect of the mining activities among members of the group.”
We’re looking for clarity from Finance. What is intended by that “sharing in mining payments” reference? As Dan had mentioned previously, this isn’t defined anywhere else in the legislation. There is no other mention of that. Our concern is “share” could be interpreted quite broadly. The anecdotal example that we tend to use is this: Imagine a real estate agent who assists a seller in selling their house. If they earn a commission on that, can it be said that they are sharing in the revenues that the seller has for that house? That doesn’t make much sense. It’s really a commission base and not a sharing of revenue. It’s just paying using the revenues for the services. But we’d like Finance to commit that this is the understanding in this case as well.
Mr. Brock: If I could add, we have followed these hearings and the hearings of the Senate Banking Committee, and Finance officials have come before you and other committees and been asked questions, and they provided a range of answers. We’ve been parsing that carefully to see whether we can get the clarity from it, and it hasn’t happened yet.
There are established rules for payment in this industry, the manner in which payments are calculated. They are defined terms. We would like the Finance officials to say whether this form of payment, if a company receives this form of payment, are they sharing. If a company receives this form of payment, are they sharing? That kind of clarity will help these companies understand what their exposure is and how they should organize themselves going forward, if indeed they want to be able to claim input tax credits.
Senator Moncion: If I understand you correctly, when they’re using companies that are not in Canada, so they’re selling the service to a Texas company, they cannot charge, or they don’t charge taxes to the company.
Mr. Brock: That’s right.
Senator Moncion: And what this legislation is bringing forward is a tax that if it’s not charged to the American company, it’s going to have to be paid by the Canadian company who is doing the mining.
Mr. Brock: It’s not quite that way. Canada is charging GST on their exports; it’s just that they’re charging nothing. It’s rated as zero. So the idea that you would have a Canadian company pay a tax because the foreign company is not paying a tax, that’s not the way the GST is supposed to work.
Senator Moncion: No, but when you were talking, you were saying that that cost is going to be incurred by the Canadian company.
Mr. Brock: That’s right. In other words, the Canadian company is not going to be able to claim credits for the taxes it paid on its inputs. Normally, they would claim credits on the taxes paid on their inputs, and if they sold their service in Canada, they would charge GST on that service. If you export the service, it’s rated zero and you don’t charge GST. And that’s, as I said earlier, to create a competitive strength for Canadian industry.
Senator Moncion: Okay, got it.
Are you going to be impacted by the $195 million, the recovery? Are credit unions impacted, because you said at some point that you’re not selling services or credit card services.
Mr. Hatch: As of this evening, it’s our understanding that we will not be directly impacted by this, but that could change. Again, we only recently became aware of this. We’re trying to gather that intelligence from our members. Of course, Desjardins is going to be, as we’ve learned tonight, in a significant way. We’re supportive of their position, but right now, it’s not yet clear whether or not there will be an impact across the sector in the rest of Canada.
Senator Moncion: Thank you. And for your information, I asked the question about why the definition was not in Bill C-47 this time, and the answer was that it was going to be in the fall, so I am watching.
Mr. Hatch: Thank you.
The Chair: Senator Dagenais has not used the minutes of Senator Duncan. Before we go to the second round, Senator Duncan, do you have a question?
Senator Duncan: Thank you all for your patience and your appearance today. I would like to follow up on the digital asset mining. What I heard you explain is that this is a tremendous opportunity for Canada in terms of growth, employment, and I should say, a tremendous opportunity for those locations in Canada with an abundance of clean hydroelectric power or green power. Sadly, the Yukon is not one of them.
But that being said, in the information you provided, the high‑performance computing operations are not located in the major centres, but instead in Christina Lake, B.C., Sherbrooke, Quebec and Drumheller, Alberta. This isn’t a specific answer we need tonight — if you could submit it in writing. Were there any provincial or municipal incentives provided to these high‑performance computing companies to locate in those specific locations? Were they offered a cheaper power rate? Because if we don’t look at the silo of the GST or the CRA, when we take a whole-of-government approach, have you received funding in other areas?
Mr. Brock: I could get more detail. We will go back, and I will canvass the coalition for that. But my understanding is that these companies have been given no incentive to locate in these areas. In fact, they go to these areas and say, we’ll pay top dollar for your power. What they’re looking for is infrastructure. What you have in Canada is a lot of infrastructure in the form of facilities that were used for industries that have left, and they have largely been left underutilized or mothballed. But they have ties to the transmission lines. They have access. The facilities were built for the purpose of drawing lots of power to do manufacturing or other things.
That basic infrastructure is very attractive to these companies, because they can go into a fairly remote industrial space and set up their computing centre there and draw down power from a tie to the transmission grid that already exists.
What is attractive about this, these remote locations — that’s why these industries have gone to Drumheller; Christina Lake; Wabush, Newfoundland; Sherbrooke, Quebec; and Saint-André, New Brunswick.
Senator Duncan: Perhaps you could provide that in a more fulsome way in writing.
The Chair: Mr. Brock, you mentioned Saint-André, New Brunswick. That’s where I live, in that area.
Mr. Brock: I didn’t know you lived in Saint-André. I knew you were from New Brunswick. I understood the New Brunswick connection. If I’m being honest, that partly informed my decision to reference Saint-André, if I’m being honest.
The Chair: That’s great. Honourable senators, we’ll move on to the second round.
Senator Marshall: My question is for Mr. Brock, but I’ve got a really quick question for Mr. Hatch. When will you know whether you’re impacted by clauses 114, 115 and 116? Do you have any idea?
Mr. Hatch: We’re in the process of gathering that information. We’ve spoken to some of our members. The feedback has been that it’s not clear what impact it will have, but there could very well be some direct or indirect impact. Probably not in the same ballpark as Desjardins in terms of the number, but that is speculation right now.
Senator Marshall: Could you let us know once you determine that?
Mr. Hatch: Yes.
Senator Marshall: I want to go to the digital asset mining, Mr. Brock. We’re talking about a growth industry now in Canada, and you were talking about the revenues and the 1,500 jobs. But the companies want certainty. Are they going to wait for the Canada Revenue Agency auditors to get in there and make a decision? Do you think that it’s too late for clarity, because you’ve already said there’s a company that was in Newfoundland that has moved to Texas, and then you said there were two more that went to other countries? I mean, government moves slowly. Do you think that it’s too late for clarity for the industry?
Mr. Brock: No, not given what we’ve heard from Finance officials. The companies have been making the investment decisions they have because they have believed and have been worried and have been advised by tax experts that they’re going to be caught by this legislation. They have these outstanding input tax credit claims sitting with CRA, and you have this new law that purports to provide its own form of clarity about how the industry will be treated.
I don’t think it’s too late. If these companies got clarity and that clarity was, in fact, that because you are selling your computing services to an identifiable recipient who is a non‑resident, you’re entitled to your input tax credit that would take care of the uncertainty overnight. So the issue of tax uncertainty created by this legislation could be resolved.
Our expectation is if we got that clarity from Finance, we are engaged with officials at CRA right now on that period before, February 2022. These are constructive discussions, and we believe that officials want to get it right. Clarity will help us get there. If indeed Finance means what they say, that the bulk of this industry — if not all of it — will be exempt from this law, the industry is here to say, “We need more clarity on that; it’s not good enough to leave this ambiguous and leave the uncertainty with the companies.”
That’s what we’ve been trying to achieve by engaging with this committee and others, and by moving the amendment. That’s our hope.
Senator Marshall: You’re thinking that the companies are going to wait — they won’t wait forever, but they’ll wait quite awhile —
Mr. Brock: They’re not going to leave, but they’re not making investment decisions to grow. This is one issue; the tax issue is one issue. But engaging with provincial governments and provincial utilities is also a challenge for the industry. We believe that is again because there’s a misunderstanding about the Canadian component of this industry.
Electricity policy and the development of energy policy for grids across Canada is going to be a very important issue as we move to electrification. This industry actually has things to offer, positively, to grid managers, because it’s a load you can turn on and off. You’re adding base load to the grid, not peak load. So this industry has the potential to create more efficiency for grid operators and more revenue.
In Sherbrooke, Quebec, where Bitfarms operate, they’re the largest electricity customer for Sherbrooke. In February, it was -42 degrees Celsius in Sherbrooke or something, and Bitfarms got a call from the utility saying that they would have to dial Bitfarms down for 24 hours, and they did it. That power was available to the grid to reallocate to other, more important uses at that time.
Not all industries have that flexibility in terms of their consumption of power. This industry does.
Senator Marshall: You were saying the one in Newfoundland, which is my province —
Mr. Brock: That’s right.
Senator Marshall: — you said that one moved out because there was an issue with regard to power.
Mr. Brock: That’s exactly right. The company that was operating out there has a small operation of six megawatts of power, which is not an insignificant amount of power, but for this industry, that makes them a small player.
Senator Marshall: Where was that one?
Mr. Brock: In Wabush. They had pulled together a consortium of international investors that were going to access about 150 megawatts of additional power from the dam. That process of engaging with the provincial government became challenging, and there was some concern about allocating that kind of power.
There are other issues for the industry to confront, and it is actively confronting it, but the tax issue is an unforced error, from our point of view.
Senator Marshall: But the Newfoundland one didn’t move to another province; it moved to another country.
Mr. Brock: To another country, yes.
Senator Marshall: Thank you.
[Translation]
Senator Forest: I have a quick question for Mr. Hatch. We know that, for Desjardins, the impact is $30 million. Are you able to assess what the financial impact might be for your members?
Mr. Hatch: We will know soon if there will be an impact, but for now, we do not know; we are assessing that with our members.
Senator Forest: Thank you. Will you be sending us that information?
Mr. Hatch: Yes, of course.
Senator Forest: My question is for Mr. Brock or Ms. Barry. The public is not very familiar with mining. What I find interesting this evening is that, basically, it is a computer calculation service that is used for exchanges, particularly with Bitcoin.
Have you been able to explore the potential of that exceptional service, given that it uses quite a lot of energy? In Canada, the climate is on our side, we have political stability and energy production capability, so we have a very interesting position globally, given these three factors. Have you been able to assess the potential of that sector compared to services that we do not know yet? Does this area require consideration? Are there any efforts to popularize this potential? I am a bit surprised to hear from you on that this evening. It opens up many possibilities.
[English]
Mr. Brock: The coalition is going to probably become a more formal industry association called the digital asset business council, and that will probably happen over the summer. One of the first priorities of the digital asset business council will be to commission a study, probably from Deloitte, KPMG or EY that could explore what the current economic benefits are of the industry in Canada, as well as what the potential for that could be.
In that, we’re just talking about the industry as it is today: computing power being used to supply and power the bitcoin network, which I said earlier, is the network that is creating the most value. But there could be, and we expect there will be, other networks that become very value-creating, if you will, and that’s just in the blockchain space.
Then, beyond the blockchain space, the interface of blockchain and AI technologies, all of which are going to be hugely demanding of computing power in order for them to operate.
So there’s the potential of this industry, given what we know about it today — and it is significant — but then the unknown is the potential beyond the industry for Canada to become the premier supplier of high-performance computing power globally.
There’s not really an answer to the question of what the full potential is, because no one fully appreciates where this is all going to go, but as I said in my opening remarks, the value that we know is going to be created, given the vagaries of the valuation of bitcoin — we know that value is going to be very significant, as those blocks get added to the blockchain. That revenue can accrue to Canada through this industry.
[Translation]
Senator Forest: These really are theories and assumptions, but is that development potential a financial lever rather than a sector that will create jobs? It is not really a sector that requires significant employability.
[English]
Mr. Brock: When you think about it, this industry is moving into locations that were intensely employing industrial factories. These computing centres don’t produce the hundreds of jobs that the forestry company or the hockey stick manufacturer might have used in the factory, but the jobs they are creating are high‑value, high-end jobs; they’re high-tech jobs.
The 25 high-tech employees in Sherbrooke are all earning $150,000 to $200,000. That employment is significant in that community.
It’s not only just the potential for job creation — and we’re not really sure exactly how many direct jobs get created as this industry expands; it’s not the forestry industry and it’s not other manufacturing, but they are important jobs and important parts of communities in Canada.
[Translation]
Senator Forest: If we take the example of Rimouski, there is a large Telus data storage centre. As the city was in competition with other cities, what makes the difference — apart from the fact that Rimouski has an amazing mayor — is the climate, as the climate average is lower. This factor can also be significant for the mining centre.
[English]
Mr. Brock: These mining centres prefer the cold climate. Being able to draw cold from outside to cool the machines is important.
The other thing that is happening in this industry is that the technology for cooling high-performance computers is being developed in Canada by these companies. So it’s cheap to take cold from outside, but there are other opportunities as well.
[Translation]
Senator Gignac: Allow me a short preamble for the tens of thousands of viewers watching us online and the tens of thousands who will watch the recording later.
We have representatives here from the leading corporate financial group which represents 7.5 million Canadians, with assets of $400 billion, and who have returned half a billion dollars in dividends, not to major shareholders, but to middle-class Canadians and, in some cases, less fortunate Canadians. They are here this evening even though they have suffered no impact to date. They have not received anything following the Court of Appeal decision in favour of CIBC. They have still not received anything and will not receive anything either from what is coming. They want to be here this evening because they stand in solidarity with the Canadian Bankers Association, who are competitors to the cooperative movement. They stand in solidarity with their competitors, who in some cases received millions of dollars following the decision. So I would like to acknowledge that and mention that it is highly commendable.
I have two questions, if time permits.
Do you agree or disagree with the Canadian Bar Association, who said that if this bill is passed with this retroactive measure, it will affect Canada’s image as a democratic country based on the rule of law, if the federal government itself does not recognize court decisions? Representatives from the Canadian Bar Association appeared before our committee. They had some harsh words and said that this would affect Canada’s reputation. Do you agree?
Mr. Brun, I would invite you to respond first.
Mr. Brun: Thank you for your question, senator.
These are obviously very sensitive issues. In terms of democratic principles, the executive’s respect for the judicial system is of paramount importance. When a judicial decision is made by the government and the executive says that it will not appeal that decision, but by another means adopts retroactive legislation, this thwarts all that. That certainly affects Canada’s image and credibility in that respect.
I would add another point. We talk a lot about figures and money, but I believe that the most important element is truly the principle.
There has been some turbulence recently throughout the global financial sector. It reminded us all of the importance of financial stability and risk management. In our opinion, financial stability is a range of factors. However, a non-retroactive application in a somewhat arbitrary context is an extremely important element. Otherwise, credibility is in fact impacted. That is why we are here to strongly express our opposition to this retroactive application.
Senator Gignac: I share your opinion because Canada is a champion — Canada is a democratic country based on respect for human rights and the rule of law. However, when it is not happy with something, it suddenly decides to take such measures. I have never seen that.
Mr. Huot, maybe you could answer my second question. I have known you for decades, as I worked with you a long time ago.
You have seen all kinds of court decisions, but can we say that it is a precedent to see a court ultimately decide on something? The government loses on appeal and decides not to appeal the decision before the Supreme Court. Then, it waits 26 months — Have you ever seen that in a case like this? The witnesses from the Canadian Bankers Association and the Canadian Bar Association told us that it is unprecedented.
Do you agree with that statement?
Mr. Huot: I agree. It is unprecedented. I have been a tax professional for 30 years and this is the first time I have seen this type of situation.
Senator Gignac: That is all. Thank you.
[English]
Senator Smith: We like to keep Mr. Brock awake, because he hasn’t had enough questions.
Mr. Brock, you’re saying that the Canadian mining companies supplying computing power to foreign identified entities. The foreign entities pay the Canadian company a commission for their computing service in various forms, including bitcoin.
Mr. Brock: They pay fees. They pay fees for the computing services, yes.
Senator Smith: The government position is that the Canadian mining company is sharing in the income because they got paid in bitcoin. Can you confirm that this is the main point of contention that you want clarity on?
Mr. Brock: It is one of the main points of contention. It seems to be that Finance is preoccupied with the fact that the manner of payment from these mining pool companies is to pay in bitcoin. The contracts that they have can allow them to be paid in bitcoin or fiat currency. If the mining company wanted to be paid in fiat currency instead of bitcoin, they could be paid in fiat currency.
The reason the mining companies want to be paid in bitcoin is because the investors in these mining companies want to be invested in this blockchain space without themselves having to own bitcoin. So the companies are paid in bitcoin, they hold their own reserves of bitcoin, and they themselves convert their bitcoin to fiat currency to make investments in power and other things. They’re not paying for their power with bitcoin. They convert it to Canadian currency, and they pay it in Canadian currency.
Senator Smith: Does this give the government the justification to charge GST and PST?
Mr. Brock: I don’t think it gives it justification at all. It’s a technicality but an important one. When the mining pool company does its mining activity and puts the block on the blockchain, they receive service fees from the blockchain. They also receive the block incentive, which is 6.25 bitcoins. Those bitcoins go into a digital wallet that belongs entirely to the mining company.
The Canadian company is providing the computing power. They have no claim over what is in that wallet. They’re not in a joint venture. They’re not sharing in those proceeds. If the mining company went bankrupt tomorrow, the Canadian companies would be in line with every other creditor.
The bitcoin that they are paid comes out of a different wallet. Yes, they’re paid in bitcoin, but not the bitcoin that’s just been mined. They’re paid in other bitcoin.
Again, all of that is besides the point. It shouldn’t matter whether they’re paid in bitcoin that was mined or not. They know who they’re selling their service to, and they know they’re getting paid for that service.
Ms. Rozansky: What is being used as payment should have no implication on the treatment of the underlying service. Bitcoin is a financial instrument much like debt securities, equity shares and whatnot. If they were paid in any of those things, it should be treated in the same way.
Senator Smith: If they were paid in fist currency, would that alleviate the concern of Finance Canada?
Mr. Brock: If they were paid, sorry?
Senator Smith: In fist currency.
Ms. Rozansky: I assume in fiat.
Senator Smith: A brilliant young guy just sent me that.
Mr. Brock: In fiat currency? Again, I don’t know why we would put that requirement on the company. Why would we try to tell them how they should get paid for their services? That would make no sense.
Ms. Rozansky: Again, that’s the clarification we’re looking for from Finance. We don’t know what it means to share in mining payments.
Mr. Brock: If Finance would say that, that this would make a difference, that would only expose the fact that this is not good GST policy.
Senator Smith: You’ve made your point. Thank you.
[Translation]
Senator Loffreda: My question is for the representatives from the Desjardins Group.
I think we have covered the question well several times. My colleague, Senator Gignac, spoke about your results. I congratulate you for your results and for everything you do for our communities.
I will talk about the financial industry. It has revenues of $195 billion, with net profits of close to $60 billion for 2022.
In your presentation, you stated several times that clauses 114 to 116 could have an impact on the stability of our financial system. Could you provide some clarification on that?
We have already discussed several aspects of that issue, but do you really think that there would be major consequences for the industry, given the figures that I just cited? Do you think our economy will be affected?
We understand that our judicial system must be independent, but senior officials in the Department of Finance have said that you were aware of everything and that it was not news for the industry. They are surprised at everything that has happened since.
Could you talk more about that aspect, particularly about the fact that your statement about the stability of our financial system is quite bold, a major statement?
Mr. Brun: That is a good question; it will allow us to discuss the issue a bit more and clarify certain things.
There are really two points to consider. There is the issue of the amounts — we are talking about large figures.
In our opinion, it is not really about amounts. We are not at all talking about the effects — I think that needs to be set aside. It is really a matter of principle, regarding a measure that is quite simply — There is a rule, there is a challenge, there is a debate that goes through all the stages and through the judicial system. You tell us that there is a clear discrepancy between the perception of certain people in the Department of Finance and our own perception, as we had no signs to indicate that the government would move in this direction.
The issue is related to the timeline, the application of a retroactive measure and the decision by a court. And the deadlines for appeal were left to expire as they waited over two full budget cycles.
When all that is clear and decisions should have been made by tax experts and accounting teams at financial institutions, when all that is broken down, it is not good for the financial system, which requires some predictability and certainty. Parliament is sovereign. If it decides to apply rules prospectively and to impose them in the future, we may not like it, we may not agree, but we will live with it.
With retroactive application, intentions need to be very clear and action must be taken in a timely manner. Our colleagues might want to add elements, from a technical standpoint, about all the impacts on calculations and on breaking everything down. The best signal is not being sent to the national and international financial system, who are looking at what is happening in Canada. We are proud of our financial system and we, in fact, think that better standards need to be developed in this respect.
Senator Loffreda: If we propose no amendments but the government promises to only apply the amendment prospectively, would you be satisfied?
Mr. Brun: Certainly, if the government makes a clear commitment in that respect, I believe that that clarifies the situation and resolves the problem. This type of thing must not happen. We need some predictability. If the government decides not do that, it will be done prospectively.
Senator Dagenais: I have two short questions for Mr. Brock. First, I would like to come back to the deployment of digital asset mining companies. The current tax system is such that every province has taxes that are added to the GST, except Alberta. Are we to understand that those that invest in that type of operation will, clearly, choose to set up in Alberta for taxation reasons? Also, if we look forward 5 or 10 years, what is the policy and economic risk of welcoming those businesses if they are to experience a crash or crashes in their value, as we have seen recently?
[English]
Mr. Brock: I’m not sure what shenanigans you’re referring to. That’s what came through on the translation. Maybe I could address the first question and then hand to you.
The impact for a company like Bitfarms operating in Quebec not being able to claim the input tax credits is around $10 million a year currently. The negative impact on them of not being able to reclaim their input tax credits is about $10 million. That amount is reduced significantly or was reduced by two thirds if they were to relocate into Alberta. None of the companies have said to me in their various overtures and discussions with parliamentarians, Bloc Québécois and others, they didn’t say, we’re going to move, but they’re publicly traded companies and have an obligation to maximize the investment to their shareholders.
The fact that the GST is perversely creating a very tangible economic incentive for these companies to relocate from jurisdictions which have a high combined HST to other jurisdictions that either don’t have a sales tax or don’t have a combined GST/provincial sales tax, those provinces tend to be in Western Canada and the provinces that are harmonized tend to be in Eastern Canada.
Ms. Rozansky: If I may, there is a specific rule for financial institutions in the legislation to avoid this entire shifting of operations to these lower-tax provinces. It is the Selected Listed Financial Institution Attribution Method Regulations which essentially say that a financial institution that falls under these rules has to reattribute their unrecoverable tax based on where their activities are across Canada. No similar rule was introduced for this legislation.
[Translation]
Senator Dagenais: Would electricity providers be paid in cryptocurrency?
[English]
Mr. Brock: Not that I’m aware of. My law firm isn’t paid in crypto-currency and I don’t think yours is, but who’s to say where this goes. I mean, even the Bank of Canada’s view on the industry is there is a reason to be concerned about financial stability and our economy and consumer protection. These are legitimate concerns. But the bank has also said there is real potential opportunity here for efficiencies and innovation and we shouldn’t be just ignoring that potential. Caution, yes, but not to throw the baby out with the bathwater.
Senator Pate: I’ll go back to you, Mr. Brock. Here again before the House committee you talked about the number of jobs being created particularly for those under the age of 35, well‑paying jobs, high-tech jobs. There are many thousands of Canadians who have been financially harmed by crypto-asset fraud through theft, scams and that sort of thing. In Canada, between 2017 and 2020, it is estimated that fraud, being crypto‑currency fraud, increased by 400%. Individuals who lack technological literacy, like me, as well as those who have reduced access to technology, unlike me, including those living in poverty, formerly incarcerated, the elderly are particularly vulnerable to falling victim to such predatory schemes. As you know, I’m presuming you know, in 2022 Canadians lost $308.6 million to investment fraud, nearly double that lost in 2021, and most of it was attributed to crypto scams.
One of the suggestions has been that we look at better assurances and protections of the public by more public access to information. My question to you is how you would see addressing this and why, in your opinion, given these issues the government should support the adoption of more lenient tax measures for the industry.
Mr. Brock: First, I don’t think I would describe it as adopting lenient tax measures for the industry. What the industry has asked for is to be treated like every other industry for GST purposes. The GST doesn’t make a value judgment on the nature of your revenue-generating activity. It says if you generate revenue, you pay GST and you can recover GST on your inputs. I would say that’s a distinction.
You’re focusing on — and rightly so — consumer protection issues that are part of this new and emerging technology. The companies in the coalition acknowledge that’s an issue that requires attention and regulation. Some of the solutions to those problems will be found within the technology and within the industry. Importantly, a lot of the solutions to those problems will be found with good regulation and oversight. The security commissions across Canada are actively involved in, generally speaking, more the consumer-facing part of this sector.
The platforms themselves — we have one member of our coalition, DMG Blockchain, based in Christina Lake, B.C. They have a subsidiary company that develops software for security purposes for being able to track transfers and identify bad actors on the network. In the United States and elsewhere, regulators and governments are in sort of a constant battle of developing the tools that will allow them to effectively regulate and police this sphere.
This is not unique to blockchain. Issues of consumer protection, especially in new and emerging areas, are often going to go hand in hand with the growth of an area at its early stages when even regulators and governments don’t understand what’s really going on well enough to be able to protect Canadians.
Senator Pate: Would you agree then with Professor Vanessa Iafolla from Wilfrid Laurier University who talked about this particular area being difficult because it’s designed to be anonymous and transactions are often particularly difficult to trace?
Mr. Brock: The anonymity on the network is both what attracts people to use the network and it also presents these challenges from a law enforcement and regulatory point of view. I would agree that is something that really does require attention, but I don’t know if the solution is to remove the anonymity. People have a right to their privacy if they want, but still people don’t have a right to be involved in illegal activity.
Senator Pate: If there are ways your organization has looked to address these issues, that will be incredibly useful if you could send those to the committee.
[Translation]
Senator Moncion: When we met with people from the department, they told us that they would be looking for an overturned economy among financial institutions and that you would recover those amounts from your members, in the case of credit unions, and from their clients, in the case of banks. For savings cooperatives, they are also your members.
I mentioned the Canadian Bankers Association this morning and they are very disturbed about the issue of retroactivity. I am not sure that what Senator Loffreda proposed earlier would resolve the situation. I am not certain that the government would necessarily want to make that change now, but we will see.
You mentioned Canada’s image in terms of the legal factors. I would like to hear from you on the importance of the principle of legal stability in Canadian law and the potential impact of the retroactivity of the measure proposed in clauses 114 and 116, which aim to amend the past state of the law. Could this precedent and the lack of predictability affect consumers? If so, how?
Mr. Brun: Thank you, senator.
Those are very good questions. When we talk about financial stability, it is important to see that it is a broad concept that includes a series of factors. Reference was made to all types of things. My colleagues from another group of witnesses who appeared concerning a different matter also talked about it. It is a series of elements. For us, the predictability of rules is an important element. Why? Because the financial institution itself, which deals with many stakeholders, counterparts, partners and clients, needs that predictability to evaluate and estimate costs, to evaluate investments and give them a credit rating, and for a whole series of factors.
For us, retroactivity is not just a problem in itself; the problem is that the retroactivity exists, even when clear decisions have been made by the judicial system, because there was no appeal, because a deadline expired, because two budget cycles have passed and because no indications were given.
Such a context affects the coherence and the stability that is being sought in Canada. Does that affect the situation right now? Yes, it casts a shadow on the perspective that an outsider would have of the Canadian system. It is also especially not the time to do it right now, when the financial system and economy are facing increased pressure. We consider this measure to be very ill-advised. It’s certainly not deliberate, but it is ill-advised. We want to deal with a specific issue; very well, let us do so. That’s why we say that the measure should be prospective, not retroactive.
[English]
The Chair: Honourable senators, before we do adjourn, as chair I think there is a consensus around the table without a doubt that we do have a common denominator which is all about transparency, accountability, reliability and predictability.
To the witnesses, you have been very informative. You have been very enriching in sharing the information and answering the questions. In my book, I would say very educational also, especially when we look at a new emerging sector which is the digital asset mining coalition, and I could not ask a question for Saint-André.
Mr. Brock: We managed to get Saint-André on the record.
The Chair: Honourable senators, our next meeting will be Tuesday, June 6 at 9 a.m. to continue our study on the subject matter of Bill C-47.
(The committee adjourned.)