THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
OTTAWA, Tuesday, February 27, 2024
The Standing Senate Committee on National Finance met with videoconference this day at 9:07 a.m. [ET] to study the subject matter of Bill C-59, An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: I wish to welcome all the senators as well as the viewers and witnesses across the country who are watching us on sencanada.ca.
[Translation]
My name is Percy Mockler, senator from New Brunswick, and Chair of the Senate Committee on National Finance. Now, I would like to ask my colleagues to introduce themselves starting from my left.
Senator Forest: Welcome, everyone. Éric Forest and I represent the Gulf senatorial division in Quebec.
Senator Gignac: Hello. Clément Gignac from Quebec.
[English]
Senator MacAdam: Jane MacAdam, Prince Edward Island.
Senator Loffreda: Welcome. Senator Tony Loffreda, Montreal, Quebec.
Senator Ross: Krista Ross from New Brunswick.
Senator Kingston: Joan Kingston, New Brunswick.
Senator Pate: Kim Pate. I live here in the unceded, unsurrendered territory of the Algonquin Anishinaabe.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Smith: Larry Smith, Montreal, Quebec.
The Chair: I have received two motions from two senators. As chair, I will ask the committee to look and listen carefully, and if you have any comments before we go to our witnesses, we will recognize the procedure for the two motions that will be presented.
I recognize the first senator with a motion. Senator Marshall, the floor is yours for the motion, please.
Senator Marshall: Colleagues, you may recall that when the Parliamentary Budget Officer, or PBO, testified the week before last, I raised the issue of corporate income tax and indicated that I would be interested in an analysis of corporate income tax to find out the various sources, like the luxury tax, the resource tax that Senator Galvez was interested in and tax from financial institutions. I was tasked by the committee to go back and return with the motion.
So I have looked at it, and here is my motion: The Standing Senate Committee on National Finance requests the Parliamentary Budget Officer to analyze the composition of corporate income tax on 2020-21 to 2028-29 by sector. Then I give some examples: resource sector; financial institution sector; and/or type of tax, for example, luxury tax.
The Chair: We have had Senator Marshall read the motion. Are there any questions on the motion presented by Senator Marshall? If not, I will ask: Is that motion adopted by the National Finance Committee? Is it agreed?
An Hon. Senator: Agreed.
The Chair: I see there are no questions, and therefore the motion is carried. Also the clerk will inform the PBO’s office.
As chair, we have also received a motion from Senator Kim Pate. At this point, I will now recognize Senator Pate for the motion in question.
Senator Pate: I had originally planned to call for clause by clause following the testimony of the February 28 witnesses scheduled for tomorrow because the preference would be to hear these witnesses, at least two of whom have a lot of experience with these issues. However, given that there is uncertainty about whether the committee meetings will proceed tomorrow given the Senate schedule in the chamber, I wanted to bring this motion forward today in large part because we’re not able to receive assurances that the rescheduling of these witnesses could happen any time soon and likely wouldn’t be until the fall of this year.
Given that and given that Bill S-233 has received a comparable number of meetings and witnesses to other private, non-governmental bills this session, which has allowed us to consider the key financial questions in those bills, we are proposing to move to clause by clause to allow consideration of the bill to continue in the Senate as expeditiously as possible. I move that at the next meeting of this committee, the committee proceed to clause-by-clause consideration of Bill S-233.
The Chair: Honourable senators, you have heard the motion put forward by Senator Pate. Are there any comments or questions from the senators in view of this motion that has been presented?
Since there are no comments, is it adopted that at the next meeting of this committee, the committee shall proceed to clause-by-clause consideration of Bill S-233? Is that adopted, honourable senators?
An Hon. Senator: Agreed.
The Chair: Therefore it is agreed.
Today, we continue our study on the subject matter of Bill C-59, An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023.
We’re focusing on Parts 1, 2, 3 and 4 of the bill. We are pleased to welcome senior officials from Finance Canada to discuss those measures with us — Parts 1, 2, 3 and 4 of the bill. Welcome and thank you to the officials of the Department of Finance Canada for accepting our invitation to appear in front of the Senate National Finance Committee. I understand that three officials will be making opening remarks and the others will help with answers if needed.
[Translation]
I am pleased to introduce Lindsay Gwyer, Director General, Legislation, Tax Legislation Division. She will talk about Part 1.
[English]
Also, Mr. James Greene, Senior Executive Advisor, Tax Policy Branch, will speak on Part 2.
[Translation]
I also want to introduce Pierre Mercille, Director General, Sales Tax Legislation. He will talk about Parts 3 and 4.
[English]
I’d like to ask all the other witnesses that I did not name to please introduce yourselves should you be called upon to answer questions.
Lindsay Gwyer, Director General, Legislation, Tax Legislation Division, Department of Finance Canada: I’m going to talk about Part 1 of the bill. I’m here with a number of my colleagues sitting behind me to answer questions about Part 1 of the bill. It contains the income tax measures in Bill C-59. There are about 20 measures, so I won’t have time to do an overview of all of them, but I’ll run through several of the most important measures in Part 1 and give a brief description. We would, of course, be happy to provide more details and overviews of any of the measures.
The bill would implement a number of integrity measures. The first two of these are recommendations from the Organisation for Economic Co-operation and Development, or OECD’s, base erosion and profit shifting project. The first would limit the deductibility of net interest and financing expenses by certain corporations and trusts to a fixed ratio, which, in most cases, would be 30% of taxed earnings before interest, taxes, depreciation and amortization, or EBITDA. The second OECD‑related measure would implement a set of rules that deal with hybrid mismatch arrangements, which are cross-border tax avoidance structures that exploit differences between the tax treatment in two different countries. Other integrity measures in Part 1 include an anti-avoidance rule to prevent private corporations from avoiding the refundable tax on passive income — that’s referred to in the bill as the substantive Canadian-controlled private corporation, or CCPC, measure; revised rules to facilitate genuine intergenerational business transfers — those are rules that relate to the private member’s bill, Bill C-208; rules to deny the dividend received deduction for dividends received by Canadian financial institutions on certain shares they hold as mark-to-market property; and changes to strengthen the general anti-avoidance rule, or GAAR, in the Income Tax Act. Part 1 would also implement a new tax on share buybacks, which is generally a 2% tax that applies to the net value of equity repurchases by Canadian public companies, trusts and partnerships.
In addition, Part 1 also includes a number of incentives and tax credits. First, it would implement two of the government’s green investment tax credits that have been announced in recent years. The first is a refundable credit available to taxable Canadian corporations on eligible equipment used in carbon capture utilization and storage projects. The second is a 30% refundable credit available to taxable Canadian corporations and real estate investment trusts, or REITs, for investments in certain clean technology.
The bill also includes labour requirements that require companies to meet certain prevailing wage requirements as well as to hire a certain number of apprentices in their businesses in order to attain the highest rate for the credits I just mentioned.
Other incentives in the bill include changes to the flow‑through shares rules to allow expenditures related to all forms of lithium, including lithium from brine to qualify for the Critical Mineral Exploration Tax Credit and treatment under flow‑through shares rules.
There’s an extension of the phase-out applicable to the reduced rates that apply to zero-emission technology manufacturers as well as an extension of the activities that qualify for that reduced rate.
There are changes to create what are called employee ownership trusts and to facilitate their treatment under the Income Tax Act.
Finally, there is a change to double the rural supplement for the Canada Carbon Rebate.
In addition to those measures, there are also a number of other smaller, technical measures that I won’t get into. We would be happy to provide more details on any of those in the meeting.
The Chair: Thank you.
James Greene, Senior Executive Advisor, Tax Policy Branch, Department of Finance Canada: Thank you, Mr. Chair, and good morning to all.
Part 2 of the bill would enact the Digital Services Tax Act.
[Translation]
The government prefers to take a multilateral approach to digital taxation. Canada has actively participated in discussions with 140 OECD countries since 2017. The government announced the digital services tax (DST) in the 2020 fall economic statement as an interim measure. It will apply until a multilateral approach comes into force. Budget 2021 sets out the details.
A two-pillar multilateral plan was agreed to in October 2021. Countries without the DST, such as Canada, agreed to pause the implementation of the DST until the end of 2023, in order to give time for negotiations on pillar one to conclude. Countries that had DST prior to 2022, such as France, the United Kingdom and Italy, were not part of that agreement. They have continued to apply their own digital services taxes.
[English]
The government announced in 2021 that if the new treaty was not in force by the end of 2023, the government would move ahead to impose the digital service tax, or DST, for 2024.
Today, the Pillar One treaty is not yet in force. Negotiations are still under way. In line with the plan, the government is proposing the DST legislation. This legislation was released in draft in December 2021 and again in August 2023. Businesses have known what to expect.
The DST is a 3% tax on gross revenue earned from certain digital services. It applies to large firms with global revenues of at least €750 million, which is an OECD tax standard, and at least $20 million in digital services revenue linked to Canadian users.
The tax focuses on digital services that leverage the data and content contributions of Canadian users, specifically online marketplaces, online targeted advertising, social media and related user data sales.
The DST would apply equally to Canadian and foreign-owned businesses. It would come into effect on a day to be set by order-in-council on or after January 1, 2024. As announced in 2021, the first year of application would cover corporate revenues back to January 1, 2022.
Meanwhile, the government continues to engage with our international partners.
Thank you.
The Chair: Thank you, Mr. Greene.
[Translation]
Pierre Mercille, Director General, Sales Tax Legislation, Department of Finance Canada: Hello, I would like to briefly describe some of the measures in Parts 3 and 4 of the bill.
Part 3 includes amendments to the Excise Tax Act and Part 4 includes amendments to the Excise Act, 2001.
[English]
The amendments in Parts 3 and 4 are, by and large, what we refer to as technical amendments which affect limited stakeholders in very particular situations.
The Department of Finance consults publicly on most amendments before including them in a bill. The work does not stop here, as we receive comments from stakeholders and the Canada Revenue Agency, or CRA, on amendments when they are made into law.
For example, in terms of technical amendments, Part 3 includes an excise tax measure that specifies who is eligible to claim a rebate of excise tax for goods purchased by province for their own use to ensure that the rebate can only be claimed once. Absent this new rule, there was a theoretical risk that the same amount of tax could be claimed twice as a rebate.
Another such example would be ensuring that an election related to supply made within a closely related group of persons — that includes a financial institution — may not be revoked on a backdate basis without the permission of the Minister of National Revenue. This is done to avoid game-playing by some businesses.
There are also a few simplification measures in Part 3 and Part 4 to increase compliance by businesses. For example, under GST/HST, the amount of information that must be provided on an invoice for a recipient to be able to claim an input tax credit increases with the value of the invoice. The measure in Part 3 increases the thresholds for which more information must be provided therefore simplifying compliance for businesses.
Another such example relates to a special return that some financial institutions must file. The measure in Part 3 is proposing to raise the income threshold for the requirement to file the information return by certain financial institutions therefore simplifying compliance for certain financial institutions that won’t have to file that special information return anymore.
Finally, there are a few relieving amendments in Part 3 and Part 4 of the bill. For example, it is proposed to expand the GST/HST exemption for services rendered to an individual by certain health care practitioners to include professional services rendered by psychotherapists and counselling therapists.
Another example is that Part 3 is proposing to extend the 100% GST rebate in respect of new purpose-built rental housing to certain cooperative housing corporations.
[Translation]
This concludes a short description of the type of measures in Parts 3 and 4 of the bill. I hope I did not exceed the time we were allocated. A number of officials who specialize in each of these areas are in the room and will be able to provide you with more details if you have any questions. Thank you.
[English]
The Chair: Thank you for your comments.
Senator Marshall: There is a lot in the bill. We will not be able to do it justice. I have pages of questions.
Ms. Gwyer, the denial of the dividend deduction by Canadian financial institutions, there have been a lot of additional taxes imposed on those corporations over the last three or four years. For this item, can you tell us how much the government expects to collect as a result of this tax? I know it’s outlined in one of the budget documents. I am interested in that number.
How much additional tax has been collected under the other changes that have been made to the taxes on financial institutions? There were several on the banks a couple of years ago. Can you talk about dollar amounts?
Ms. Gwyer: Yes. I would have to come back to you on the second part of your question.
Senator Marshall: You don’t have the information there?
Ms. Gwyer: I can give you the information from the budget in terms of the costing on the measure. In terms of the other measures that you’re talking about, we’d get back to you.
Senator Marshall: How about this one in 2.1.5? Do you have that there?
Ms. Gwyer: In 2024-25, it would be $715 million.
Senator Marshall: That’s good. Thank you.
My next question is the tax on stock buyback. That’s been discussed over the past year. I know it was mentioned in a previous budget document.
It seems that what the government is saying to these corporations is that we’re going to tax you more because we want you to invest more in Canada, which seems to be counterproductive. What sort of analysis has been done to support that change in the Income Tax Act? Has the government considered that these kinds of taxes are actually encouraging corporations to invest outside of Canada or to move outside Canada? It seems very counterproductive.
We’re very concerned about Canadian companies investing outside Canada, and we’d like to see that improve. However, this piece of legislation seems to be counterproductive to that.
Max Baylor, Director General, Business Income Tax Division, Department of Finance Canada: Hello, I’m Max Baylor, Director General with the Business Income Tax Division at the Department of Finance.
The best way to address your question is to come back to the genesis of the tax. As you mentioned, the intent of the tax is to raise revenue and at the same time encourage corporations to reinvest in the company and workers. About the point you’re getting at in terms of competitiveness, the context for the tax was very much the introduction of a similar tax in the United States. The Inflation Reduction Act, as you know —
Senator Marshall: My question is more about what sort of assessment is done. When you’re going to impose taxes on corporations, do you look at the advantages — which is more revenue for the government to spend — but also the impact it will have on investment in Canada? Do you look at that? There are pros and cons to every tax, so are you just looking at the pros or did you look at the cons?
Mr. Baylor: I think we looked at both sides, and I think it came down to competitiveness. To be direct, with the United States imposing a similar tax, Canada looked at the measures that were there, contemplated whether something similar was warranted in Canada and came to the determination that would be appropriate.
Senator Marshall: There must be something wrong with your analysis because a lot of corporations would rather do business in the United States as opposed to in Canada. It just seems like that is counterproductive.
I’ll go back to Ms. Gwyer. The basis for the legislation is the fiscal update. When you look at the fiscal update, you see a lot of these refundable investment tax credits. There are a couple going into effect this year, but a lot of them are in the future.
What’s the cost of the first two that are going into effect now? These are the refundable investment tax credit for carbon capture, utilization and storage and the one for clean technology equipment. What’s the cost of those two?
Mr. Baylor: I can take that one.
I’ll give you the combined cost for the carbon capture, utilization and storage. There are two measures. It was initially introduced in Budget 2022.
Senator Marshall: And there are five more, yes.
Mr. Baylor: There was an extension in Budget 2023. Combined over the horizon at the time from 2022 to 2027-28, the expected cost for the carbon capture, utilization and storage investment tax credit is $4.6 billion.
Senator Marshall: Okay. Do I still have time?
The Chair: Second round, please.
Senator Marshall: Okay, because I do have a question. I just want to read this. It’s 2.1.6, which is on the carbon tax rebate — clause 30.
The Chair: You will be on second round.
[Translation]
Senator Forest: Thank you for your presentations. First, I am particularly concerned about the intergenerational business transfer, which was part of Bill C-208; I would like to know about the restrictions introduced by Bill C-59 when it comes to the intergenerational transfer of a business with respect to what Bill C-208 was proposing.
[English]
Ms. Gwyer: In general, the amendments really maintain the spirit of Bill C-208, but they add safeguards to ensure that a transaction really is an intergenerational transfer.
I’ll just run through it. At a high level, there are two options. A taxpayer can choose to transfer their business on a gradual basis or on a quicker basis. The quicker basis is generally about three years and the more gradual could be up to 10 years. The conditions are slightly different for the two. It’s intended to provide flexibility. That’s one difference compared to Bill C-208, which doesn’t have these two different options.
Under both of the conditions, the parent has to relinquish control of the business that is being transferred. That’s one of the safeguards. There are slightly different tests under the two conditions, but they also have to transfer their economic interests in the business. Initially, they have to transfer at least 50% of their common shares in the business, and then they have to meet certain thresholds in the future in terms of eventually transferring the rest of their economic interest.
The parent also has to transfer management of the business and the child has to retain management and control of the business for some period of time after the transfer. Again, it depends on whether it’s the gradual or the more immediate transfer. The child has to also continue to work in the business. Those are the conditions that are in Bill C-59.
[Translation]
Senator Forest: When you talk about the delay, either a more accelerated transfer or a longer one, there is a five-year window for managing the business. As for the 10-year timeframe, are we talking about the balance of the sale payable that remains secured over a period of 10 years? Have I understood these two measures correctly, that one has to do with governance and the other with capitalization?
[English]
Ms. Gwyer: Yes. The 10-year test is under the gradual business transfer, and it relates to transferring economic interests in the business. Under the gradual test, if it’s a farm and fishing corporation, the parent has to transfer more than 50% of the fair market value of their interest within 10 years. That includes any interest in the business, including preferred shares and not just common shares. Fifty per cent of the common shares have to be transferred up front.
If it’s a small business corporation, they can retain maximum 30% of their interest in the business in terms of the economic interest in the business during the 10-year period. Under that gradual transfer, the child has to be maintaining their position in terms of management of the business for five years.
[Translation]
Senator Forest: So, after five years, the parent must not have any share capital and, after 10 years, no economic interests at all?
[English]
Ms. Gwyer: Initially, immediately after the transfer, the parent has to transfer at least half of their common shares. They could retain debt in the company. They could retain preferred shares — non-voting shares that have a fixed interest. However, under that gradual business transfer option, within 10 years, they have to reduce that extra interest down.
[Translation]
Senator Forest: Have you held consultations about these transfer conditions, particularly with the Fédération de la relève agricole du Québec, which has been very active on Bill C-208, and the Canadian Federation of Independent Business?
[English]
Ms. Gwyer: I believe the answer is yes. I’m not sure specifically who everyone is that we consulted with. We did consult very extensively for two years. We met with everyone who reached out to us, so I think the answer is yes.
I could confirm for sure if we consulted with those organizations. The rules really reflect the extensive consultation we had. They were released for consultation twice. Even prior to that, it was announced in Budget 2022 that we would be making these changes, and they were described at a high level. We then consulted on that before releasing draft legislation. The rules really reflect our attempt to make sure they work effectively to allow businesses to be transferred.
[Translation]
Senator Gignac: I welcome the witnesses. My first question has to do with taxes and share buybacks. How was this $1‑million threshold determined? There was some mention of it in the budget. Can you talk about the harmonization aspect, with what’s happening south of the border with the United States?
Mr. Baylor: To answer your first question about the $1‑million minimum threshold for gross share repurchases, the idea was to exempt small transactions so that any company making a minimum repurchase would not be subject to the tax. At the same time, we wanted to reduce the red tape that could be imposed on this type of transaction.
The $1-million threshold was deemed appropriate to achieve this objective. I will point out that this threshold is similar to that in effect in the United States, which is also one million dollars.
Senator Gignac: Is the 2% rate similar to that in the United States? How did you get to that rate? Did you look at other OECD countries to make that determination?
Mr. Baylor: In the United States, the tax is 1%. In Canada, it is 2%. Again, this is a government decision. Maybe I can make an observation on this subject. In terms of revenue, proportionally, the number of share buybacks in the U.S. is much higher than in Canada. We’re talking about twice as much. We’re therefore looking at something similar in terms of revenues.
Senator Gignac: That brings me to my next question. For everyone who is watching, when we talk about share buybacks, we should point out that executives are often compensated through stock options. Moreover, to avoid shareholder dilution, many companies resort to share buybacks. What could be their impact? The company has to be based in Canada, and this is particularly common in the technology sector, where we already have very few of those companies. Given that we don’t have the same rate as the United States, isn’t there a risk that some tech companies will decide to set up shop in the U.S., precisely to avoid paying this additional amount?
Mr. Baylor: As I said, the tax is equivalent relative to total revenue.
Senator Gignac: You say it’s equivalent? The tax there is 1%, while here it’s 2%. This is actually double the rate. I’m trying to figure out what logical analysis you based this on. Did you do any impact studies? We saw the results with the luxury tax. The government will ultimately receive less money because of the impact on jobs at Bombardier. Having a tax rate different from that in the United States, especially in a highly mobile sector like technology—we’re not talking about manufacturing companies here—is certainly a determining factor. I’m trying to understand what you’re basing this on. As I said before, the purpose of share buybacks is often to avoid shareholder dilution, since executives are often paid with stock options, which ultimately make up the bulk of their compensation.
Mr. Baylor: I may be repeating myself, but, to be clear, the decision is ultimately to increase the rate to 2% to raise revenues. Proportionally, given the size of the U.S. economy, we’ll see a relatively similar increase in revenue in Canada.
Senator Gignac: You’re talking about the revenues from that tax.
Mr. Baylor: Yes.
Senator Gignac: You also talk about going with the 2%. If not, could you send us that information in writing, if possible?
Mr. Baylor: No, we have that information. I’ll find it, if you give me a moment. It was in the 2023 budget. It mentioned $2.5 billion over five years, or about $500 million per year. At maturity, we’re talking about $600 million or so.
Senator Gignac: My next question is on a completely different topic. I appreciate your answer, although the fact that you’re using a different rate from that in the United States is worrying me a bit.
I would like to talk about the refundable tax credit for carbon capture, utilization and storage. With COP28, we know that several countries have committed to ending subsidies to oil companies. Whether a company makes a profit or not, it receives a refundable tax credit. Will we consider this tax credit as a subsidy to the oil industry? We support the fight against climate change and we support new technologies. I’m afraid the rest of the world will tell us that we’re boosting our subsidies to the oil and gas industry, because a refundable tax credit, in my view, is virtually a subsidy.
Mr. Baylor: As you may know, in July last year, the government published an analytical framework on inefficient fossil fuel subsidies. This analytical framework contains the criteria the government uses to define what constitutes an inefficient subsidy. I will try to find this document, since I think I have it with me.
Senator Gignac: Time is running out and I may get back to this in the second round. The government admits that the refundable tax credit is more of a subsidy, but it will be classified as effective rather than ineffective.
Mr. Baylor: That’s right. There are basically six criteria.
Senator Gignac: We’ll be playing a bit of a word game here, because some other countries simply don’t want us to continue subsidizing the oil and gas industry. However, Canada’s position is that we will eliminate inefficient subsidies, and this one is efficient. Is this, in a way, what we are to conclude?
Mr. Baylor: That’s a good summary. To wrap up, I think the government has been very transparent in its analytical framework. It stated that this is how we’re going to assess these subsidies.
[English]
Senator Smith: I just wanted to follow up on the question Senator Gignac asked regarding the anti-avoidance rules. Should I speak to you, Ms. Gwyer, on that?
Ms. Gwyer: I’m not sure which anti-avoidance rules you’re referring to, but —
Senator Smith: The question I have is this: Could you comment upon and explain the specific anti-avoidance rules that have been set up in this section related to equity repurchase?
Ms. Gwyer: Sure. At a high level, the rules tax net equity repurchases, which are repurchases of shares that are issued for cash and certain other shares that are issued such as for employee stock options and for assets. It’s a fairly high-level rule.
We try to anticipate all of the situations where people might be able to plan in such a way that would let them avoid the tax. We have attempted to do that, but as is common with income tax rules, we also have a specific anti-avoidance rule that basically says that if somebody does something that is not one of the things we specifically contemplated or specifically provided for in the rule — if they do that and one of their main purposes is, effectively, to avoid the tax, then this rule could apply to cause the tax to apply. It could effectively recharacterize what they did depending upon the situation. That’s a common thing in income tax rules.
Senator Smith: Could we take a look at the digital services tax in Part 2? To whom do I speak? Is it Mr. Greene? Thank you.
Could you provide us information on what types of digital services would be captured under this new tax? What would be the projected annual revenues for the government from this tax?
Third, what are the revenue thresholds that would trigger the tax?
Mr. Greene: I would be pleased to do that.
The tax applies to online businesses that are, in particular, reliant on the collection and effectively monetization of data and content from their users. These are business models where data collected from online users is a key value driver and input. Examples of those are online marketplaces that bring together buyers and sellers of goods and services and, for example, facilitate transactions between them. Those could be taxi rides, goods and services that you buy, meal delivery and so on.
Social media services is another example, platforms that help people to connect with one another, post information and share it, and online advertising which is directed based on data gathered from users. It’s targeted to its audience based on information that’s collected about the kinds of things that people are interested in. Those are the main categories.
Senator Smith: Have you done projections in terms of the actual annual revenues that you would be able to get from this tax?
Mr. Greene: It’s expected to raise around $800 million growing to $900 million a year.
Senator Smith: Could you outline the revenue thresholds that would trigger the tax?
Mr. Greene: The tax applies to large companies. There are two thresholds, essentially. The corporate group has to have global revenues of at least €750 million. That may sound like a strange figure, but that’s an international standard that’s used for the purpose of many OECD tax standards for designating large corporations. The second requirement is that the group has at least $20 million in digital services revenue associated with Canada.
Senator Smith: How does the tax align with other jurisdictions around the world? What are they doing? There have been some concerns regarding the United States and this type of tax. Could you give us follow-up on that?
Mr. Greene: Yes. The government has expressed that its preference would be to follow a multilaterally agreed-upon approach in this area. Canada has been engaging in international discussions going back to 2017. Those discussions have continued on. To date, the deadline for completing a multilateral treaty on a common approach has been pushed back several times.
There are other countries that have implemented digital services taxes, for example, France, the U.K., Spain, Italy — those countries implemented taxes in 2020 and 2021. Canada announced that we would go ahead with a tax and made the announcement at the end of 2021.
The U.S., as you say, has been concerned about these taxes. The U.S., though, has agreed to essentially tolerate DSTs that were introduced by, I believe, seven countries prior to 2022. Canada’s hadn’t been implemented at that time.
As part of this multilateral process, Canada agreed to hold off imposing our tax for two years until the end of 2023 in the hope this would allow enough time for the multilateral approach. We are still waiting for the multilateral approach to be agreed upon.
Senator Smith: Thank you.
Senator MacAdam: I have a question on Part 1, income tax measures, and it’s in regard to the doubling of the rate of the rural supplement for climate change incentive payments.
Increasing the rate of the rural supplement for Climate Action Incentive payments from 10% to 20% for the 2023 and subsequent taxation years as well as referencing the 2016 census data for the purposes of the supplement eligibility for those taxation years.
Would the basic Climate Action Incentive amount in Prince Edward Island be increased in line with the increase to the rural supplement that eligible recipients from other provinces would receive? In other words, for P.E.I., would it go from 10% to 20% for the entire province?
Pierre Leblanc, Director General, Personal Income Tax Division, Department of Finance Canada: Thanks for the question. I’m Pierre Leblanc, Director General of the Personal Income Tax Division at Finance Canada.
Essentially, all residents of Prince Edward Island receive the same amount. Effectively, it includes the rural supplement.
The government has recently announced Canada Carbon Rebate amounts for 2024-25. In that, the amounts for Prince Edward Island — as for other provinces where the federal fuel charge applies — they are based on the proposed increase in the rural supplement.
Senator MacAdam: Thank you.
Another question at Division 9, Part 5 regarding the amendments to the Federal-Provincial Fiscal Arrangements Act regarding the information to be published about certain payments. It retroactively amends section 42 of the act I cited to specify payments about which —
Mr. Mercille: May I just say something here? You referred to a question on Part 5. The officials are here today to answer questions on Part 1 to Part 4. There will be another session where other colleagues from Finance Canada will be here to answer that question.
Senator MacAdam: Thank you.
Senator Kingston: My questions for Mr. Mercille are about the cooperative housing corporations under Part 3. What would make them eligible? What would be the prescribed conditions that need to be met by cooperative housing corporations to be eligible for the rebate? You had suggested that it could be up to a 100% rebate in your remarks.
Mr. Mercille: We have the specialist on that rebate here. What I would answer is that what the legislation provides is the power to prescribe by regulation the condition that a corporation must meet to be able to have the 100% rebate for purpose-built rental depending on when it was been built and concluded.
It’s the same thing as was previously announced in the fall for regular, purpose-built rentals. This is an addition to it to have more complete coverage, to cover the market more completely.
Senator Kingston: Can you expand on what those criteria are? Thank you for coming forward. What are those criteria? How do you get from a 50% to a 75% or a 100% rebate? Is it either zero or a 100% rebate?
Amanda Riddell, Director, Real Property and Financial Institutions, Department of Finance Canada: My name is Amanda Riddell. I am the Director of the Real Property and Financial Institutions section in the Sales Tax Division at Finance Canada.
The rebate is either zero or a hundred. Either you are in or out based on meeting the criteria. The criteria for a cooperative housing corporation to be in would be the same as the criteria that are used for anyone building a purpose-built rental building to be in. As long as that cooperative housing corporation meets those criteria, they would be eligible.
The government announced that cooperative housing corporations can’t be essentially equivalent to home ownership. There would have to be some additional conditions that would attach to cooperative housing corporations to ensure the rebate is being extended to true rental situations as opposed to those that are more akin to home ownership.
Additional regulations will be introduced to set out conditions to explain what would be a rental co-op versus an ownership co‑op, but those regulations are in draft form. Decisions would need to be made by the government, and those will be released in due course — hopefully, in the near future. There would be a period of time for people to comment on those, and then they would be put into final regulation.
Senator Kingston: Ms. Riddell, what is the status of the goods and services tax rebate currently provided to cooperative housing?
Ms. Riddell: What is the status? To provide some context, Bill C-59 rules were included because, under the current rules, co-ops had a completely separate set of rules and we needed to turn those rules off in order to allow them to access this 100% purpose-built rental rebate. All that Bill C-59 really does is turn off the special rules in the Excise Tax Act for cooperatives, and that will allow them to claim the purpose-built rental rebate. However, they still have to satisfy the conditions in that it has to be at least four units, four apartments or ten individual rooms, et cetera, and 90% of the units have to be held for long-term rental. Then, of course, there will be the additional conditions that have yet to be released that will tell whether a cooperative housing corporation is more on the rental side versus a home ownership equivalent.
Senator Kingston: Has it actually been turned off?
Ms. Riddell: It will be with Bill C-59 if it is passed, but it has not been yet.
Senator Kingston: So all of those things will happen in the future once —
Ms. Riddell: Yes.
Senator Pate: Thank you to all the witnesses. My first question is for Ms. Gwyer.
I’m curious as to how the government identified the measures included in this part to seek to address tax avoidance as a priority. In particular, what metrics were used to determine that these measures would result in those who have the most resources, particularly those who lobby for beneficial tax measures and contest legislation in court, being held to the same expectation for contributing their fair share?
Ms. Gwyer: Different things led to different measures, but as I mentioned at the beginning, two of the measures relate to implementing recommendations from OECD’s base erosion and profit shifting project. That’s something Canada has been participating in for many years, and those are measures that are largely aimed at cross-border tax avoidance; they are for identifying situations where they largely involve multinationals and situations where people are taking advantage of differences between countries and trying to move their profits around.
Other measures in the bill are based on situations that, often, the Canada Revenue Agency has identified. We regularly talk to the CRA and they inform us of things they’re seeing out in the world in their audits. They identify situations, and we often create rules to try to deal with those situations.
The changes to the general anti-avoidance rule, which is an overarching rule that applies in the Income Tax Act, there’s a strict test that has to be met: You need to have an avoidance transaction, and it needs to result in a misuse or abuse of the rules of the act. That’s something for which the courts have set the standards for what qualifies as a misuse or abuse.
Those changes to improve and strengthen that rule — effectively, that rule has been in place for 30 years, and that relates to what we’ve seen over the past decade or so in terms of Supreme Court decisions and from discussions with the CRA in terms of the challenges they face when they try to apply that rule. That is the impetus for that change.
Senator Pate: Mr. Mercille, to follow upon my Senator Kingston’s question, I’m curious why this temporary 100% GST new residential rental property rebate would not include an affordability test. Specifically, it seems to me that the urgency and importance of a GST temporary rebate for luxury rental apartments in downtown Toronto, with monthly rents of $3,000, differ from those aimed at affordable rental housing for low-income groups.
Shouldn’t we be considering allocating a larger portion of limited tax subsidy resources toward affordable housing for low‑income families and individuals, perhaps even providing a degree of rent subsidy to low-income families to meet their urgent housing needs?
Mr. Mercille: The quick answer to that is that’s a decision for the government to make — to not to include those criteria. I’m not sure if Ms. Riddell wants to add more to that, but I have nothing more to add.
Ms. Riddell: I think he’s absolutely right: That is a policy decision for the government. Of course, this isn’t the only program that’s being introduced; there’s a whole range of programs that are being introduced, many of which are targeted at affordable housing.
But in terms of limit versus not limit, there are things you would want to take into consideration. One of the big things is certainty. For builders, you’re trying to incentivize them to build. From the planning stage to the completion stage, builds can take five to eight years. If you put a threshold there, the builder doesn’t know at the onset, necessarily, that those units will qualify for a rebate. So not having that limit provides certainty to builders that they are going to qualify for the rebate and that they can complete their pro forma, cost estimates and move forward, knowing they’re going to get the rebate.
One of the other considerations that you want to look at when adding a limit or choosing not to is that, first, newer units tend to be a bit more expensive than the older stock, and second, larger units that are suitable for families, like three-bedroom units, for example, tend to be more expensive as well. So if you’re trying to build the whole spectrum of housing to ensure that families have places to live and maybe seniors who are downsizing have suitable accommodation to move into, putting a threshold on there may not allow for the building of that full spectrum of units. Any kind of limit, like $300,000, $400,000 or $500,000, would favour smaller one-bedroom apartments that might not be suitable for everybody.
Senator Pate: Following up on that, clause 143 of the bill merely equates the support for cooperative housing with other new purpose-built rental housing through the same temporary 100% GST new residential rental property rebate. It seems like this level of effort is mismatched with the current severe housing crisis. I know you’ve answered some things around that, namely that those are policy decisions of the government.
But to your knowledge, has the federal government considered further tax support for cooperative housing? I’m looking at Ms. Riddell, but perhaps this is for Mr. Mercille. If so, what specific measures are being contemplated?
Ms. Riddell: I can’t speak to those other measures. I am aware there are other cooperative housing measures that are being introduced that are not on the tax side. Again, I can’t speak to them, but I understand that there are some, yes.
Senator Pate: Thank you. I’ll go on a second round.
Senator Loffreda: Welcome to the Finance Committee this morning. My questions are on the 2% tax on the share buybacks.
Although the government’s objective is to encourage Canadian firms to reinvest in their businesses and workers, there are some concerns. Canada represents just over 3% of the world’s capital markets, and our long-term goal is to increase that number and encourage both foreign and domestic investment. We’ve talked about what this will result in — and I do understand this is similar to the Inflation Reduction Act in the U.S., where they’re taxing 1% on the share buybacks. Our tax is 2%. Is there not a competitive disadvantage? We all know, in the U.S., they attempted 2%, but the Republicans brought it down to 1%. But there are advantages.
Here is my concern. Corporations do have a choice where to list their shares when they do a public listing, it may be an investment in a small start-up but, eventually, they’re looking at an initial public offering down the line, but the advantage of share buybacks is reducing the cost of capital. The tax will put limits on the allocation of capital. Many times, a share buyback will result in reinvestment in smaller firms with better growth potential, ownership consolidation, preserving stock prices, undervaluation, you buy back your share, boosting financial ratios and increasing earnings per share. Even Warren Buffett believes that a lift to per-share intrinsic value is created by a share buyback.
Is it a competitive disadvantage, yes or no? Will it not result in an increase in dividends?
If we have the magic triangle, it would be client, employees and shareholder. The shareholder wants to maximize his value. Will it not lead to issuing equity qualifying as substantive debt in the future, which is excluded by this measure? The effects of the share buyback in the U.S. are uncertain, so why did we jump into this without knowing what effect it would have on Canadian corporations?
Mr. Baylor: On the first point, I think the answer is similar to what I discussed earlier in terms of the comparison.
To your second point, in terms of if this will lead to going to other forms of payment, that is certainly something that is possible. I think that the corporations will have to look at the implications of that. There are different implications in terms of, as we discussed, corporate finance. There could be different implications in terms of taxation, depending on the type of transaction. There can be different implications in terms of accounting, so, ultimately, it will be up to the corporation to address that and make its decision. It is the same for the U.S., as a matter of fact.
To the last point and to your question about how this affects the ability of firms to do the type of transactions that you were mentioning, certainly in the U.S. and in Canada as well, there has been a very large increase in the amount of share buybacks in recent years — or a large increase — and I think that that type of increase has led to this reaction in the U.S. Again, we saw similar increases in Canada.
What exactly is behind that, I don’t know that I really know an answer or that I’ve seen that, but I think that is part of why this was introduced, and that, sort of, goes beyond the type of transactions that firms need to do that you were alluding to.
Senator Loffreda: Thank you for the response, but I just want to get to the bottom of it — do I have a little bit of time?
The Chair: Question, please, senator.
Senator Loffreda: I just have a comment and maybe a reflection on your part.
When we do put a tax, is it just window dressing or do you really know what effect this tax will have on Canadian corporations?
A share buyback is when you have excess capital. You are buying back. You are reinvesting in your own firm and your own shares. Will this lead to riskier reinvestments? That excess capital will still be there. Firms always operate at optimal capacity or a maximum level to optimize profits, so does the government really believe it will result in a reinvestment in their own firms or is it just window dressing?
Do we have numbers from the U.S.? We’re not certain what that tax did lead to in the U.S. — or are we? Has there been any analysis done to justify that?
Mr. Baylor: In the U.S., the numbers aren’t out, but there have been — they came in a year earlier than we did, right?
Senator Loffreda: — first, right.
Mr. Baylor: Now, the official numbers from the government aren’t out because of the lag in the reporting, but some independent institutions have looked at this question — for example, the Congressional Budget Office, I believe.
I think they looked at it from a lens of whether the revenue estimates are still valid, and based on the information they were seeing, they recently came out with revenue estimates that were very similar to the ones that came out initially.
We’re not quite there yet in terms of seeing the official data, but I think what is being seen to date, it appears that it is consistent in terms of the revenue estimates in the U.S. Again, I think that is to be confirmed once official —
Senator Loffreda: To be followed up, I guess, as to what effect it will have. Thank you.
Senator Ross: Thank you very much for speaking to us today.
This question has to do with the digital services tax, so I guess it’s for you, Mr. Greene. When the intention of creating a digital services tax was raised in 2020, at the time it was mentioned that it would not be implemented until 2024. Bill C-59 is making it retroactive to January 1, 2022. The specific information was just released in November.
I’m wondering about your thoughts on how business could make proper business decisions when they didn’t know this information, and I’m wondering why it’s being made retroactive and not allowing them time to plan and prepare. Mr. Greene, you said, “We held off,” but by making it retroactive, that’s really not holding off.
Mr. Greene: Thank you, chair.
I think there may possibly be a misunderstanding. The government, as you say, first announced the digital services tax in November of 2022, and they said at that time that the plan was that the tax would apply starting — sorry. They announced it in November 2020. They put out the details in Budget 2021, and the plan was for the tax to start in calendar year 2022, not 2024.
The government, though, agreed, as part of this international negotiation, that at the end of 2021 they would hold off for two years and were willing to delay the start of the tax until 2024 in the hopes that an international agreement might make it unnecessary, but the government said at that time — in October of 2021 — that if the international agreement has not come into place by the end of 2023, our plan was to impose the digital services tax in 2024 with effect back to the beginning of 2022, the originally announced date. That has been a feature of the draft legislation that was released in December of 2021, so before the 2022 year.
The government has been consistent. Businesses have known that this was coming or, at least, that there was a possibility it might not happen if a multilateral approach could be agreed upon in time. Unfortunately, that has continued to prove elusive, so the government has announced — kind of reluctantly — that it will go ahead with the measure.
It does have retrospective application, but businesses have known what the rules would be, and they’ve known that this would be the result. In that sense, it’s not retroactive. I don’t think anyone can claim that they are surprised.
Senator Ross: What impact do you think this will have on the businesses that will have to pay this?
Mr. Greene: The digital services tax is a tax on these businesses that engage in, essentially, leveraging data from Canadian users. That includes both domestic firms and foreign firms.
These are all large businesses. As mentioned, the threshold is €750 million, so that is about $1.1 billion Canadian in revenue. That is the threshold. These are firms that have considerable financial resources.
The digital services tax will be deductible under general principles. If the firm is paying Canadian corporate income tax, like other non-income taxes — property tax and resource levies — if the digital services tax is a fee, a cost that is laid out to earn corporate profits, then it’s deductible under general principles.
The Chair: Thank you.
Honourable senators, we will now move to the second round, and as we looked at the measures contained in Part 1 to Part 4, we will continue.
Senator Marshall: My first two questions are for Ms. Gwyer, and this really entails the entire bill, so I’m posing it to you.
Can you tell us what the financial impact of the bill is in its totality? I don’t know if you have it there or if you can send it in later, but certain parts of the bill raise revenue and certain parts are costing revenue, like the rebates and subsidies. So I’d like to know what the net financial impact of the bill is, and I only need it for the first year. If it’s available for all the years, that would be great, but I’m particularly interested in the first year. Do you have that number there now?
Ms. Gwyer: I don’t have it in front of me, but that’s something that we can come back and provide to you in writing.
Senator Marshall: Thank you very much. My next question is on the 2.1.6, where we’re talking about the carbon tax rebate. Can you explain why the government is proposing to change the census period back to 2016 for two years rather than the current census of 2021? That’s very peculiar. Can you explain that, Mr. Leblanc?
Mr. Leblanc: Thank you, chair. There were some changes from the 2016 census, so maybe I’ll just step back a second.
For the Canada Carbon Rebate, individuals are eligible for the rural supplement if they live outside a census metropolitan area. This is in provinces where the federal fuel charge applies. There were changes insofar as Statistics Canada determines census metropolitan areas based on censuses. In the most recent census, there was both an expansion of some census metropolitan areas to bring in areas that aren’t particularly urban. For example, if you take Nova Scotia, the East Hants area, it is now part of the Halifax census metropolitan area as of the 2021 census.
There are also a couple of new municipalities that became metropolitan census areas unto themselves, and the government view was basically that it didn’t want individuals to lose entitlement to the rural supplement because of those changes in census metropolitan areas. Therefore, you have the proposed amendment in the bill to fix the problem for a couple of years by continuing to use the 2016 census definition.
I think you can expect the government to continue looking at the rural supplement to identify which areas qualify and to make sure that this feature of the Canada Carbon Rebate serves its purpose of recognizing that rural Canadians in provinces where the federal fuel charge applies have less opportunity to avail themselves of clean transportation.
Senator Marshall: Is that a policy decision? Am I interpreting that right, Mr. Leblanc? Is that a policy decision of the government?
Mr. Leblanc: It is.
Senator Marshall: Could it also happen in reverse that if they had used the more current census, there would be some geographical areas that would have benefited? Wouldn’t you want to preserve the status of people who benefited six years ago? Could it have worked in reverse?
Mr. Leblanc: I’m not familiar with any examples of people who would have been in a census metropolitan area based on the 2016 census but would no longer be on the basis of the 2021 census. It’s basically one direction.
Senator Marshall: They’re all in one direction.
Mr. Leblanc: Why don’t we confirm that in writing? But that’s my strong sense.
Senator Marshall: This is for Mr. Greene. I understand reading the legislation that it’s the Minister of National Revenue who is responsible for implementing or administering the digital tax. Is that correct?
Mr. Greene: That’s correct.
Senator Marshall: That’s correct. We’ve had Canada Revenue Agency officials in here many times. They have a lot of problems at the Canada Revenue Agency with regard to offshore taxes and answering taxpayers’ questions. Is there any dialogue going on between the Department of Finance and the Canada Revenue Agency to ensure that the collection or administration of the digital tax is going to be done properly and that we’re not going to be faced with some fiascos like they encountered in the past at the Canada Revenue Agency?
Mr. Greene: Thank you, chair. Yes, the Finance Department has been speaking since the origin of the digital services tax with the CRA to ensure that there’s a common understanding of how the legislation operates and how it’s intended to operate. I know that the agency was allocated some funding in Budget 2021 to put in place the resources necessary to administer the tax, and I think they have been doing that.
Senator Marshall: Thank you.
[Translation]
Senator Forest: Here’s my question. I want to go back to the 2% tax, Mr. Baylor. I’m worried about it, because when we look at what happened with the luxury tax and the impact that tax had — and these are concerns that we were having here when we asked whether you had done any cost-benefit analyses — we see that, after this tax was implemented, Bombardier quite simply lost out on orders. What’s more, the amount of money that the government would have collected in GST would have been greater than the amount it did collect through the luxury tax.
I just want to understand the logic. The United States imposes a 1% tax, whereas ours is 2%, which is twice as much, and the goal is to encourage reinvestment in our businesses, not to enrich shareholders. Did the government assess the impact this measure could have? Based on the figures I’ve seen, it was projecting $2.1 billion over five years. Maybe it lost $400 million along the way. As a strategy, given that the economy is increasingly globalized and the targeted companies are mobile, did the government assess the impact this could have on our business leaders and on Canadian businesses?
Mr. Baylor: As I mentioned, and I’m repeating myself a bit, I think this goes back to August 2022, when the Inflation Reduction Act was passed. We’ve talked a lot about competitiveness today, and obviously, in response to this law, a lot of measures were brought in to boost competitiveness from an environmental standpoint in the form of tax credits, as well as certain spending programs to help us keep competing with the U.S.
The Inflation Reduction Act also made it possible to implement certain measures to increase revenues, in order to finance these measures. At the time, Canada went through a similar thought process; that’s one of the aspects that was examined. We wondered whether it would be appropriate to do the same thing here that the U.S. was doing; as you know, the answer ended up being yes.
Again, regarding the amount of revenue, since we needed to come up with a number... Roughly speaking, it’s very approximate, but we arrived at something proportionally equivalent. We settled on 2% rather than 1%, because in the U.S., the amount of stock buybacks was —
Senator Forest: If I have this right, you’re saying that the government decided on 2% to get to — proportionally speaking, because we can’t compare the revenue collected from this tax in the U.S. — roughly the same tax effort in Canada as in the U.S., in a context where there were other measures that increased competitiveness. Is that what you’re saying?
Mr. Baylor: Again, these are government decisions. It’s not up to me to determine why the government decided to act this way. I’m not the one making these decisions.
What I’m telling you are some of the considerations surrounding what we see and observe about these decisions.
Senator Forest: Let me take the luxury tax as an example. Does the government, after X amount of time, assess the impact of such a tax measure, its costs for the market and our economy, and its impact on revenues? Does it do an assessment? After deciding to implement a measure without assessing it up front, does it assess it after the fact?
Mr. Baylor: Yes, we routinely do assessments with the tax system. Every year, the Department of Finance publishes a report on tax expenditures that can explain each measure in detail. This report often contains analyses of various taxes.
Senator Forest: So the report on the assessment of the luxury tax is available for us to read?
Mr. Baylor: I wasn’t talking about that. I don’t know at this stage whether there has been an assessment of that measure. My colleagues could tell you. I don’t know if any of the witnesses who are here today could talk about that tax, but it’s not my area.
Senator Forest: I believe it would be useful to have an assessment.
Senator Gignac: I want to look at the digital services tax from two perspectives: relations with the United States and inflation.
David Cohen, the U.S. Ambassador to Canada, said in late November that he was very disappointed with Canada’s approach of moving ahead unilaterally. A spokesperson for the U.S. Trade Representative said it was unacceptable. Don’t you think it’s extremely dangerous to move forward with this without waiting for a multilateral approach? Have there been any other discussions since Bill C-59 was tabled in the House of Commons? Have there been any discussions with the U.S. since early December? We’ve all but received a threat and a stark warning from the U.S. if we move ahead. The U.S. Chamber of Commerce even said they wouldn’t rule out the possibility of filing a challenge under our free trade agreements with the U.S. What are your thoughts?
Mr. Greene: I’m going to answer in English, so that I can be precise.
[English]
The government has been proceeding cautiously in this area for the reasons that you note. The government has preferred a multilateral approach. We have been actively engaged with international counterparts, including the U.S., in these discussions that go back to 2017. We have been working very hard to achieve agreement in that context, but that has continued to be elusive. The government announced the digital services tax. It agreed to hold off for two years — as mentioned — to give time for those negotiations to conclude, but was clear that we can only hold off for so long.
To be clear, other countries have not held off. As I mentioned, France, the U.K., Italy, Spain and others have been applying digital services taxes since 2020 or 2021. The U.S. has not been happy about that, but the U.S. did agree explicitly in 2021 to tolerate those taxes while the discussions were ongoing.
Senator Gignac: If I could interrupt, it’s just that the U.S. is our main partner. That’s not the case for France. It’s not the case for Italy. We know what happened with Bill C-18. Are we going to a Bill C-18 “2.0”? What happens if Netflix refuses to pay the retroactive tax. Will it stop providing service in Canada? I think it will have a lot of people on Parliament Hill because Netflix Canada is not necessarily very big on their revenue. You know what I mean.
My question is this: Assuming Netflix acts as a good corporate citizen and pays the retroactive tax, is there any guarantee that you will not pass that through to the customer at a time when we have to fight inflation? What is the guarantee that at the end of the day it’s not Canadians who will pay for this 3% additional, which will not be very good news for inflation figures. Have there been any studies done on that?
Mr. Greene: Thank you. On the first question, the government has been engaging with the U.S. The Deputy Prime Minister has noted that Canada is engaging and discussing the DST with the United States, and she’s expressed cautious optimism that we would find a common way forward.
On the issue of the impact on Canadians, the DST is a tax that would be imposed on corporations based on their annual financial results, so it’s not a tax like a GST that applies to individual sales. Companies may try to avoid the DST by passing on the cost to consumers in some cases. Obviously, market competition will place some limits on their ability to do that. It’s also important to note that many of the revenues that are subject to the DST are not paid by individuals but rather by businesses. For example, advertising fees are paid by advertisers. Some companies have purported to increase fees in response to DSTs in other countries, but it’s always difficult to determine whether that’s actually a result of the tax or if it is a rationale given for a regular course increase.
Thank you.
Senator Gignac: Thank you.
Senator Smith: I just wanted to continue along the lines of tax credit for carbon capture activities. Is this with you, Ms. Gwyer or Mr. Greene?
I just wanted to ask some simple questions. Could you provide us with some details on labour requirements that businesses must meet to benefit from tax credits for carbon capture activities?
Mr. Baylor: Yes, absolutely. In this bill, the two tax credits that are here — the Carbon Capture, Utilization, and Storage Investment Tax Credit and the Clean Technology Investment Tax Credit — are subject to labour requirements. Effectively, that means they are subject to having to pay their workers a prevailing wage and meet apprenticeship requirements.
Just to walk through how that works, a business would need to ensure that covered workers are compensated at levels that meet or exceed the prevailing wage. The prevailing wage is defined as the regular wage plus standard benefits and pension benefits as specified in an eligible collective agreement.
What is an eligible collective agreement? Basically, there are two definitions. Outside of Quebec, it would be the most recent multi-employer collective bargaining agreement between a trade union and a group of employers who are accredited to bargain together and be bound by the same agreement that may reasonably be considered the industry standard for a given trade in a region, province or territory. In Quebec, it would be those eligible collective agreements negotiated in accordance with provincial law.
Senator Smith: What types of control mechanisms will be in place to ensure that businesses actually meet the labour requirements? What sorts of penalties could be imposed?
Mr. Baylor: That is more of an administrative question, and it will ultimately be up to the CRA to enforce those mechanisms, but at a basic level, it is the responsibility of the businesses to ensure that their wages match what is in these eligible collective agreements that they look to. It’s the same thing on the apprenticeship side. If they do not, then the act is very clear on the sorts of penalties that are laid out.
The CRA, as it does in a number of cases, will have audit functions in place. Obviously, if businesses are found not to have complied with the rules, they will be subject to the penalties.
In the extreme, in cases of gross negligence — which should be rare — then they would lose access to the extra 10 percentage points provided by the labour requirements.
Senator Smith: Thank you.
Senator Kingston: My question is regarding Part 1. It has to do with the dental care plan. Is that Ms. Gwyer?
Ms. Gwyer: In Part 1, there is a measure to allow the CRA to share information related to the dental care plan. There’s no other provision related to the dental care plan. So if your question relates to information sharing —
Senator Kingston: It is about that. I was curious as to why, besides Employment and Social Development Canada and Health Canada, Public Services and Procurement Canada can also receive confidential information for the purpose of administering or enforcing the Canadian dental care plan. I’m just wondering what those necessities would be for procurement.
Ms. Gwyer: Sure. They work with Employment and Social Development Canada to facilitate, I believe, the actual sending of the letters to individuals who may qualify under the dental care plan. As you probably know, the limits under the dental care plan — the income thresholds — would be determined based on tax data. That’s the information that has to be shared. Then, it’s to facilitate the process of communicating with those people who could be entitled to benefit under the plan.
Senator Kingston: Thank you.
My next question is actually on another point altogether, which is climate change. In what way does the government believe carbon capture, utilization and storage equipment fit within Canada’s climate change strategy?
Mr. Baylor: In a nutshell, the tax credit is meant to incentivize the capture and storage of carbon dioxide and effectively decarbonize industries that are hard to decarbonize, such as concrete, fuels and plastics. This technology basically allows such facilities to capture the carbon that they emit during production and then store it safely underground so that they are no longer emitting.
In terms of a quantum, the objective of the credit and the assessment is that it would lead to capturing 15 megatonnes of carbon annually.
Senator Kingston: As a follow up, does that in any way impact some things that are being done, say, in — I’ve lost my train of thought. When we capture carbon, to actually turn it into energy, is there any intersection of those two things?
Mr. Baylor: I’m not sure I fully understand the question, but essentially, the industrial processes for which this technology is used — without it, they produce their good, and then they emit the carbon into the air. Here, all that is really going on is that, instead of doing that, they are literally building pipes on top of the chimneys and then the carbon is then sent through pipes and sequestered underground.
It doesn’t really interact with the production process.
Senator Kingston: I was thinking of landfills, in particular. That’s what was missing —
The Chair: Thank you, senator. Thank you, Mr. Baylor.
Senator Pate: I think my questions are for you, Ms. Gwyer.
Subclause 66(1) of the bill proposes a preamble to the Income Tax Act’s general anti-avoidance rule. It states that the rule:
(b) strikes a balance between
(i) the Government of Canada’s responsibility to protect the tax base and the fairness of the tax system, and
(ii) taxpayers’ need for certainty in planning their affairs.
Tax fairness experts fear that the addition of this language acknowledging needs for “certainty in planning” will be used by wealthy taxpayers to defend avoidance behaviours in court. They have suggested making a stronger statement establishing fairness as the foremost principle of Canadian tax law.
Can you clarify the intentions of this preamble? As well, how do you expect it to be understood by courts adjudicating on these issues in the future based on past decisions? Are there any estimates that you can provide regarding how much public revenue currently being lost via tax avoidance could be captured under this and other amendments to the general anti-avoidance rule in Bill C-59? If you’re not able to provide it all, perhaps you could provide some of those details in writing.
Ms. Gwyer: Sure.
Regarding the first part of the question, the language in the preamble is largely inspired by language that was in the original explanatory notes and white paper that accompanied the GAAR in 1988.
The principle of certainty is something that is regularly argued by taxpayers as a reason why both the GAAR shouldn’t be extended and, in individual cases where the GAAR or where other anti-avoidance rules are applied, taxpayers regularly argue that they shouldn’t be applied in those situations because it creates uncertainty for them. That’s a principle that’s been recognized in many cases over the past 30 years.
The purpose of the preamble is to go back to those statements that were made in 1988 and to emphasize the fact that, yes, it is important for taxpayers to have certainty, but, at the same time, the GAAR necessarily imposes some aspect of uncertainty because it necessarily applies in situations where a taxpayer has technically complied with the rules but the result that they have obtained is abusive. By necessity, that will create some uncertainty as to how the rules apply in a particular situation.
That’s really necessary in order to ensure that the rules can be applied in a fair way that’s fair for society and that results in those who should be paying the taxes that they should be paying.
I would say the purpose of the preamble is really to ensure that that aspect of the analysis doesn’t get lost in comparison to the certainty aspect, which really has been something that courts have focused on a lot.
Senator Pate: Are there estimates in terms of what that has resulted in as far as public revenue loss?
Ms. Gwyer: There’s no specific revenue estimate that was provided for the measure. Partly, it would be very difficult to cost it because it has implications across the entire Income Tax Act and it’s also a rule that’s intended to make sure that the revenues that should be generated from other rules are actually, in fact, generated.
I could give you an idea. Between 2016 and 2021, $4.1 billion was assessed by CRA using the GAAR. That was both under the primary position as well as alternative positions.
Sometimes the CRA would assess someone on the basis that they haven’t complied with the technical rules, but then the alternative argument that if, in fact, they have complied, what they have done is abusive so the GAAR would re-characterize that. The $4.1 billion reflects those two positions.
That’s assessed, so that doesn’t necessarily mean that all of that would actually be collected. Taxpayers can object to their assessments, so some of that could be successfully challenged and it wouldn’t necessarily all be collected, but I think it provides a sense of the magnitude of the issue.
Senator Pate: Do you have that data of how much is collected versus the assessment?
Ms. Gwyer: I don’t have that information. We could see what we have. It would be something CRA would have. I don’t know what we could provide, but we could look into it.
Senator Pate: That would be great, thank you.
The Chair: You could provide that in writing, please, through the clerk?
Ms. Gwyer: Like I said, CRA would have that information, not Department of Finance, but we could see what is available.
The Chair: Thank you.
Senator Loffreda: My question is on the Digital Services Tax Act. Will the DST not hurt Canada’s efforts to improve its global competitiveness in the IT and information services sector? I say that because the concern is imposing a discriminatory tax will likely reduce Canada’s growth in the area in the industry because we’re sending the wrong message to global investors by reducing the support we’re giving to this core industry by milking its profits.
Once the firm hits the threshold, which is low, before it is faced with the tax, will it not stop growing revenue in Canada here?
I look at Netflix. Will it not stop offering Canadians more offers, more opportunities to see entertainment because it hits the threshold? Although I don’t have time to see much of Netflix, I know my kids do, and I don’t want the household to be affected or parliamentarians, like we mentioned, to be affected, as such, and Canadians as a whole.
Mr. Greene: Yes, thank you for the question. In terms of competitiveness impacts, that’s obviously a very important issue. But it’s important to take into account that the tax is not discriminatory. It applies to both Canadian and foreign companies, and so in either case for companies that serve the Canadian market, that are here actively collecting and monetizing through their platforms that data from Canadian users, they will be subject to this tax if they meet the size threshold. That’s true of both domestic and foreign companies.
It doesn’t impose any differential burden. That will be part of the reality of accessing the Canadian market, so we don’t see it having any kind of negative impact on investment in Canada or on moving abroad. That just won’t affect the tax burden.
With respect to models, it’s important to note that the tax doesn’t apply, for example, to streaming services, per se. Streaming services is just kind of like online provision of digital content. The DST is not a tax on digital sales broadly. It doesn’t apply, for example, to a company that sells its own goods and services online. It would apply to streaming services to the extent, for example, that that service was collecting data from its users and then monetizing that data by, for example, selling targeted advertising, which I think may be a feature of some online services. But it’s not, for example, a tax on all streaming fees and revenue.
Senator Loffreda: Most of the streaming, like Netflix, actually do that, right? Wouldn’t they stop growing in Canada because of the low threshold in the tax?
Mr. Greene: The Canadian market is there, and if they want to access the Canadian market, this is part of the landscape in Canada, as it is in France, the U.K., Italy and in a growing number of countries.
Senator Loffreda: Okay, thank you.
I would like to have something in writing, or if there is some time at the end to discuss it, for the question about share buybacks that wasn’t answered properly.
The Chair: Do you want to ask the question now for the record and then if they can’t answer this morning, we will ask the officials to send it in writing, please?
Senator Loffreda: Yes, the share buyback is important. I wasn’t satisfied with the answer. I think we could have more information with respect to those share buybacks.
The Inflation Reduction Act has been in place for a year now. The tax of 1% in the U.S. is already in place, and what are the results? To what extent were the share buybacks a concern in Canada? Why was it put in place? The numbers, the occurrence and just to justify its existence, per se, because, as I mentioned earlier, many negatives come with respect to imposing this tax on the share buybacks. I would like to have that information, if possible, in writing if we can get it.
The Chair: Mr. Baylor, you’re taking that as a note?
Mr. Baylor: We can follow up on that.
Senator Loffreda: I would like to see the rationale behind it rather than just a window dressing saying we are taxing corporations that are not reinvesting in their own companies.
The Chair: Mr. Baylor, we have an agreement that you will provide the answer in writing through the clerk?
Mr. Baylor: I’ll check the record and we’ll respond to the record.
Senator Loffreda: I would have liked that answered this morning. Given that it’s already in place for a year in the U.S. and you have mentioned numerous times we are doing it because of the Inflation Reduction Act, I think we should have had that answered this morning saying these are the results in the U.S., this is why it will work in Canada, this is what’s happening, but we don’t and it’s fine. I would like to have it in writing if it’s possible.
Mr. Baylor: I thought I had responded in terms of the information available in the U.S., but I think having it in writing will clarify things.
The Chair: Mr. Baylor, just verify the answer to the question that’s posed, and if you can complete it in writing, we would appreciate that. We have that commitment?
Senator Loffreda: Thank you very much.
Senator MacAdam: I had a question on extending the 100% GST rebate to certain housing corporations. Do you have projections on what this will cost? I have a number of questions. I will name them all before you respond.
Can you comment on the impact that this policy decision will have? How will we know if this measure is successful and that it achieved its intended result? For example, were projections done on the number of units that would be completed and when those would be completed? It’s sort of like a cost-benefit analysis. What kind of analysis was done before this policy decision was made and what will it cost?
Ms. Riddell: Thank you, chair, for the question. The measure in Bill C-59, which is what we’re looking at today, is not the main purpose-built rental measure. It’s just the extension of that measure or the clarification of that measure also applies to cooperative housing corporations.
Senator MacAdam: Right, I’m wondering about the impact of extending.
Ms. Riddell: In terms of the costs, the entire rebate for the entire all purpose-built rental is $4.565 billion over a six-year planning horizon, and this includes rebates that any co-ops may claim. We’re not able to parse out how much of that is attributable to co-ops because the data we have is not granular enough. It doesn’t provide it by developer or project type. We are not able to distinguish how much of that $4.565 billion is attributable to co-ops.
Senator MacAdam: Okay.
Ms. Riddell: In terms of the effectiveness, are you asking about the effectiveness of the extension to co-ops?
Senator MacAdam: Yes, what was the intended outcome in terms of the number of units that would be completed and when those would be completed by extending this rebate?
Ms. Riddell: Again, because the data is not very granular with respect to co-ops and they represent a very small portion of the larger measure, it would be extremely difficult to determine how many cooperative housing units would be built as a result of this measure.
Senator MacAdam: Okay, thank you.
Senator Ross: The Clean Technology Manufacturing Tax Credit focuses on the physical property versus intangible or development costs. For mining companies in Canada, about 75 to 85% of their development falls under these costs.
So if we’re looking at developing our own critical mineral resources, what is the rationale behind not including those costs in the tax credit?
Mr. Baylor: To start, this tax credit isn’t in this bill.
Senator Ross: Clean Technology Manufacturing Tax Credit?
Mr. Baylor: Yes, that’s different from the Clean Technology Investment Tax Credit. The Clean Technology Manufacturing Tax Credit is a different credit, and the government just closed consultations on it — on the legislative proposal — but it hasn’t been introduced.
Senator Ross: I guess I’ll have to save that for another time. Thank you.
The Chair: Thank you for clarity, Mr. Baylor.
Honourable senators, we have arrived at the end of our time. I thank the senior officials of the Department of Finance. We will be waiting to continue our study on the other parts of the bill.
[Translation]
Before we adjourn, I would like to remind the witnesses to submit their written responses directly to the committee clerk.
[English]
That is the agreement and the procedure. Please respond no later than Tuesday, March 12, 2024.
As chair, I inform honourable senators that it is still unclear whether the committee can meet tomorrow night. As you all know, we have a busy, hectic week in front of us in the Senate Chamber. Steering will meet in the next five minutes, after this meeting, to discuss and also bring more clarity to the meeting tomorrow night. That said, I will ask the clerk to inform you on that matter today or, at the latest, tomorrow morning.
(The committee adjourned.)