Proceedings of the Standing Senate Committee on
Banking, Trade and
Issue 18 - Evidence - Morning sitting
OTTAWA, Tuesday, February 25, 1997
The Standing Senate Committee on Banking, Trade and Commerce, to which was
referred Bill C-70, to amend the Excise Tax Act, the Federal-Provincial Fiscal
Arrangements Act, the Income Tax Act, the Debt Servicing and Reduction Account
Act and related Acts, met this day at 9:05 a.m. to give consideration to the
Senator Michael Kirby (Chairman) in the Chair.
The Chairman: We will begin our series of hearings on Bill C-70. The bill has a
rather long title, but it is otherwise known as the bill to implement the
harmonized sales tax.
Our first of three sets of witnesses this morning is from the tax policy branch
of the Department of Finance. Our schedule for these two days will be from 9 to
12 and from 1 to 4, for the information of senators. Mr. Drummond will begin by
hitting the highlights of the bill.
Mr. Don Drummond, Senior Assistant Deputy Minister, Tax Policy Branch,
Department of Finance: As the chairman indicated, I should like to highlight a
few of the important aspects of the bill. As its short name describes, it is a
bill to facilitate the harmonization of the GST with the sales tax systems in
the Atlantic provinces; however, that is only half of the bill.
The first part of the bill features a series of simplification improvements
which were announced and, for the most part, have been administered since last
April. I should like to touch on those as well because, for the sectors
involved, those changes are important. The second part of the bill is the
I shall deal with the first part first. As I said, there are a series of changes
and a fairly large number of them. Why such a large number?
To step back into the context, the GST is a fairly new tax. We are now entering
the seventh year of operation of the tax. You can see the newness of the GST
when you compare it to our personal tax which has been in place for 80 years.
Some of the other excise taxes have been in place even longer than 80 years.
For the most part, it is fair to say that the GST, right from implementation,
has been operating quite smoothly. We have been made aware, over time, of some
difficulties in some particular areas of the tax. We certainly, over time, have
seen and been advised that there were some opportunities to make improvements.
To a large extent, we have tried to bundle those improvements into one series
which was originally announced in April.
The announcements in April were the result of a long series of intensive
consultations with a number of groups, most particularly with the business
groups which were affected by the individual measures but also, in a number of
cases, with consumer groups, and certainly with the tax professional community
as well. The consultations did not end either when we put out the proposals in
April. We obtained reactions to those proposals, and we continued the
consultations afterwards. Some improvements were made to the initial set of
improvements. The package which you now have before you reflects the
consultations up to April and continuing right through April.
A number of measures are significant to the sectors involved. I will give a few
examples. One is in the area of charities. As you know, we have roughly 75,000
charities. Their business is to be in the operation of charities, to collect
funds, and to distribute them to their cause. I do not think any of them are in
the charity business to spend time dealing with tax matters.
To facilitate that, we have raised the small supplier threshold so fewer of
those charities now must register for the GST. For those larger charities that
still must register, we have implemented a new accounting system that greatly
simplifies the operation. With these proposals, we will accommodate charities
so that they will spend less of their time on tax matters and more of their time
on their primary goals.
Another example is in health care services. We have clarified the criteria by
which various health care services can be exempt. We have also standardized
taxation with the treatment of health care services in the provinces. For
example, registered psychiatric nurses are recognized by provinces as health
care providers and regulated by the provinces. Yet, previously, their services
were not exempt under the GST. Under these proposals, their services and some
others will become exempt.
We have broadened the scope for exempt municipal services. This is particularly
important as municipal bodies get into other activities, including many now on
a user-cost basis. By broadening the scope, citizens of those municipalities
will continue to obtain those services for the most part on a tax-exempt basis.
We have made an important change in the area of used goods. You may have been
aware that, previously, when a trade-in was involved on a used good, we used a
notional input tax system. It sounded great in theory when it started, but we
have received many representations, mostly from consumer groups, that it was
not working out that way in practice. There was confusion about how it operated
and a lack of visibility and transparency to the operation of it. It would be
fair to say that, on the part of consumers, there was a certain amount of
scepticism that they were actually getting back the value of tax on their
We are proposing to replace that system with a system where the tax will be paid
on the net trade-in after the trade-in, which parallels the system used by the
provinces and is better understood by consumers.
We are expanding the tourism accommodation rebate to include non-resident
business. We are also proposing some important changes in the financial sector
which will streamline the sales tax treatment and shore up our revenue base
there and ensure that the base is protected.
We became aware that there were several aspects of housing which were not
qualifying for the new housing rebate. With these proposals, that definition
will now be extended to include owner-built condominiums and condominiums that
are built on leased land. For all intents and purposes, they were similar to
other aspects of housing that were qualifying for the rebate, but they were not.
Now, they will be on a standard footing.
There are some important proposed changes in the agricultural sector. We are
expanding the list of zero-rated farming equipment to include things like
automated and computerized farm livestock and poultry feeding systems which can
form a large percentage of the overall cost base for individual farmers.
Another important aspect of Part I relates to an announcement through a ways and
means motion last October to exempt the purchase of books by public libraries,
universities and schools, and certain charities which promote literacy. With
this proposal, those purchases of books will now be GST tax free.
In summary, some of the changes appear to be technical; however, from all the
consultations held with the industry and consumer groups, those affected by the
changes, the changes are significant and a substantial improvement.
I shall now move to the second part of the bill, the harmonization of the GST
with three of the Atlantic provinces. This probably has the higher profile, but
that should not take away from the importance of Part I.
In 1994, the House of Commons finance committee conducted an extensive study on
how to reform the sales tax system. They looked at many options, but they
rejected all of them in favour of the preferred option of a harmonized
value-added sales tax system. They also added that that should feature
That study included, in its initial step, a proposal to the provinces in the
spring of 1994 for a nationally harmonized sales tax system. That was followed
through the course of 1994 and early 1995 by several multilateral meetings with
all of the provinces and then on an intensive basis with most of the provinces
in a series of bilateral meetings. The end result so far, as you will see from
this bill, is harmonization with three of these provinces.
I wish to emphasize that the bill has a larger context than the harmonization
with the three provinces. Everything we have learned and proposed during the
discussions with all of the provinces and everything that is contained in the
bill as it now pertains to those three provinces reflects that broader context.
In order to have harmonization, whether it was with one province, with three
provinces, or with every province, some ground had to be broken. We did not
have that system in operation. Entities like the European Union are working on
it as well. They do not have that system in place. Some things had to be worked
out, and some of these issues have been worked out with this bill. They are in
the legislation before you, and three provinces will enjoy the benefits right
now, but the groundwork is there for other provinces to come in.
In order to have harmonization, you must have place of supply rules, revenue
allocation mechanisms, and administrative measures to give those provinces a
greater input into the administration of what is a shared tax. We have made
some rate and base change protocols with the provinces. They have a buy-in on
the administration of this shared tax, but they have a buy-in to the policy
determinations of this tax as well. A particularly tricky aspect is how to treat
We signed a memorandum of understanding in April of 1996 and then detailed
agreements on October 23, 1996. You have before you now the legislative
proposals. This legislation was set out in fairly rough form in the memorandum
of understanding. The detailed agreements, by their very nature, were more
detailed, and we now have the final details. Not much has changed in terms of
the basic approach, but the details have been more fully fleshed out.
There are four aspects of the legislation in Part II to which I should like to
draw your attention. The first area refers to the basic nuts and bolts of the
legislation -- that is, applying the single sales tax on a single base,
operated by one administrator at 15 per cent in those three provinces. Of
course, that means a 4 and 5 percentage point reduction relative to the
combined sales tax rates in place right now.
The proposed legislation also sets out the place of supply rules which determine
whether a taxable supply is considered to be made in a participating province.
It provides input tax credits in the cases where the 15-per-cent tax is then
This bill includes tax-inclusive pricing for certain federally regulated
industries and interprovincial advertizers. Tax-inclusive pricing has received
some attention and was the subject of a considerable amount of debate and
representation before the House of Commons finance committee.
I would first specify that, on a legislative basis, all of the legislation for
tax-inclusive pricing is not in Bill C-70 which is before you right now. Most
of it is in the provincial jurisdiction, and it is reflected in the regulations
and the legislation before those respective houses. In fact, two provinces have
passed their packages of legislation, and one is currently in the process of
doing the same.
There has been agreement since the outset of the initial discussions that we
would implement a common set of rules. That would make life easier for
consumers and make compliance costs easier for businesses. We have worked with
the provinces on a common set of rules. I do not want to give the impression
that this is all provincial responsibility; the Department of Finance has had
We have heard representations, and you may hear more during the course of your
hearings, that tax-inclusive pricing, as it was originally thought to operate
and as businesses were expecting it to operate, could cause some difficulties.
They were afraid there would be some compliance costs. We have had many
consultation meetings with the retail community and with consumers to try to
facilitate their concerns. We have offered various aspects of accommodation
where problems have been indicated.
For example, many stores operating inside and outside the participating
provinces indicated that they would still like to have one system of price
tagging across the country. We have said that that would be fine. There is
accommodation for that as long as the tax-inclusive price is shown at least as
large. If it is not buried off in one little corner, that is fine. They can use
one price tag across the country if they so desire.
We have heard that a modern retailing practice does not necessarily individually
price all the items. If you go to a Canadian Tire store, you do not often find
the price on the good; the goods are often put together in a bin or a shelf and
there is one price which goes over the bin or shelf. There was fear at the
beginning that we would be forced to put a price on each of 1,000 nuts that
might be in big bin. We said that that is not reasonable. They have proposed,
as is indicated in the guidelines, that they put the tax-inclusive price right
on that bin or shelf.
We have heard particular representations from some industries about specific
problems. For example, if you go down Bank Street a little way, there is a
magazine store which has thousands of magazines. Most of them turn over within
the space of a week. Very often, if the store does not sell them within the
space of four days, the store can return them to the printer. They do not want
them damaged with a price tag being put on and ripped off. They do not want to
spend the first two days of their four-day selling cycle putting price tags on
them. Therefore, we said that, in the cases of greeting cards, seed packages,
and magazines, you can use conversion charts which are very clear and which
would indicate that anything priced at $1.99 would be priced such a such on
tax-inclusive price. They do not have to change the prices individually.
Another aspect I would like to mention is one about which there has been
widespread confusion. We have often hear "tax-inclusive pricing"
being used in the same breath as "burying the tax in the price" and
that the consumers will no longer be aware of the price. It has been inferred
that that is the political interest in having tax-inclusive price, so the
consumer can never see it. It has even been alleged that it would enable the
government to increase the tax without the consumers noticing it. One important
feature of the provisions we have put out indicates exactly the opposite. The
retailer will have to show the tax on the sales tax receipt. They have the
option of showing the amount in dollars or in percentage or, of course, both.
There is no way the consumer will come out of the store not knowing the amount
of tax they paid. It will be right there on the sales tax receipt.
We did some polling, which we have made available publicly, and we could
certainly provide that to this committee. We have checked with consumers as to
whether it would represent their interests adequately so that they would know
what the tax was, and the vast majority of them said it was. In fact, few of
them prior to the survey realized that would be a feature and were greatly
satisfied on that account.
One aspect about which we have not yet come to a decision, and obviously we need
to do so fairly soon, regards how we treat advertising. We have received
representations on both sides of that issue, and you will probably receive
representations on both sides of that. Some say that advertising should be
entirely tax-inclusive, and others say they want flexibility. Perhaps it will be
tax-inclusive; perhaps not. Before April -- hopefully well before then -- we
will come to agreement with the provinces and put out a rule. We will be very
interested to hear the representations your committee receives on that issue.
Another important aspect of this bill is how we treat interprovincial sales.
This is a key interest of the Atlantic provinces in this arrangement since many
consumers in the Atlantic provinces now buy major items through mail order. In
theory, that does not put the local retailer at a disadvantage because the
consumer from the Atlantic province should pay the tax when the item arrives and
should pay the local provincial sales tax; however, none of you would be
surprised to hear that few of them do that. That has established a competitive
advantage for the mail-order operators who operate outside the Atlantic
provinces and has put the Atlantic provinces at a severe competitive
An attractive feature of the harmonization arrangement is that, on behalf of the
provinces, the federal government will levy and collect the tax on any sales
that go into those provinces, whether made outside the province or inside the
province. A mail-order operation outside the province will charge that consumer
the full amount of the tax. They will be put on an equal playing field.
Another important feature of this legislation is the revenue- allocation
mechanism. We now will have a pot of money from the 15 per cent. How do we
allocate the proportions for the federal government and the provinces? Also,
within the provinces, how much goes to each of the three? There are two
options: We could have a detailed tracking system in which businesses were
required to report to Revenue Canada exactly where every one of their sales
went, how much the tax was, how much was federal, how much was provincial, and
how much was in respect of each of the three provinces, or we could use a
revenue-allocation formula that depended upon economic data supplied by
Statistics Canada. We have opted for the latter.
We received strong recommendations to that effect from the business community.
We received an endorsement of that from the Canadian Institute of Chartered
Accountants. We were told that the tracking system would be too cumbersome and
too much of a paper burden on business. At the end, it was not clear that it
would be very accurate.
I notice that you have representatives from Statistics Canada on your witness
list, so you will hear about some important data improvements they are making
to accommodate this arrangement, as well as a great number of other benefits in
terms of providing more detailed and more accurate data on provincial economic
I might add that there is an extraordinary interest in the European Union in
what we have done in this field. As they wrestle with trying to achieve a sales
tax harmonization, they will have exactly the same problems, and they are
interested in how we have approached that.
You will notice that in the legislation as proposed -- and this has been the
case right since the MOUs were signed -- harmonization becomes effective April
1, 1997. To that end, we need provincial legislation, if for no other reason
than them giving us the authority to act as their agent to collect that tax.
They also must provide for the tax-inclusive pricing as well. Nova Scotia and
Newfoundland have passed that legislation, and legislation is now before the
house in New Brunswick.
Thank you very much for your time and the opportunity to make those openings
remarks. My colleagues and I welcome any questions or comments you have.
The Chairman: Thank you. I have a technical question. You said you have been
talking to the retail industry about some changes with respect to the way
tax-inclusive pricing will be handled. Suppose you were ultimately to agree
with the retail industry that certain changes would be made. You mentioned
advertizing as an example. Can such changes be made by regulation, or do they
require changes in the act?
Mr. Drummond: They can be made by regulation from both the federal and
The Chairman: Therefore, the completion of any such negotiations is not
necessary before the bill can be passed?
Mr. Drummond: It will not affect Bill C-70. The provincial legislation that has
already been passed is fairly general in setting out an overall framework, and
the specifics can be dealt with in regulations.
Senator Meighen: If I understand it correctly, the regulations may be made up to
the year 2000.
Mr. Drummond: Unless I missed something, the only provision of which I am aware
that goes to the year 2000 is not on the tax-inclusive pricing but on the
revenue-allocation formula. Perhaps I could address that.
There was nervousness on the part of the provinces with going immediately to a
revenue-allocation formula, and we have sympathy with that. In some aspects,
the data we needed from Statistics Canada is either not there or is based on
unduly small representative samples from the Atlantic provinces. There needed
to be an improvement on the data set, and we have launched that, but it will be
phased in over a period of time. It will not be there in the first month. We
said to the Atlantic provinces that we know that data will be there in a few
years and it will be good, but it is not there right now. We will take our
estimates of the revenue allocation based on the projections we have agreed to
with the provinces, and we will pay that amount each month for the first few
years. When the data are there, we will do a reconciliation exercise. We may
find that, to the tune of 1 or 2 per cent -- I do not imagine it will be much
more that that -- we have either overpaid or underpaid a province. Then we will
start a reconciliation process. If they owe us, we will not force them to pay up
in one month but will spread it over a fairly long period of time.
By the time we get into the early 2000s, we will be all square and we will be
using data from Statistics Canada, but we will not put the provinces in a
position where they do not have their money, which is important, obviously, to
meeting their fiscal objectives, subject to what is not quite an adequate
quality of available data for the revenue-allocation formula from day one.
Senator Angus: I have a few technical questions to aid me in understanding the
scheme of the legislation.
You described this bill as having two main parts. One is fine-tuning the
original GST legislation. In that regard, most of the so-called improvements
you mentioned were already contemplated at the time of the original bill. Is
that right? In other words, many of these things were set forth in the
Mr. Drummond: The improvements were originally put out on a public proposal
basis last April. A set of changes has been made since then which are fairly
minor relative to the original set of proposals now incorporated in the bill
before you. They have been in the process for some time.
Senator Angus: The vast majority of those improvements were already on the books
at the time of the previous government, were they not?
Mr. Drummond: No. The treatment of notional input tax credits and the trade-in
was something on which work began far before the recommendation was put forward
in April. Some of them have a longer history than others. For example, the
extension for farm equipment was something that also was announced before the
proposals were put out in April. Some of the equipment that we are now
exempting from tax either did not exist or was not in common use in previous
Senator Angus: I do not want to belabour that, but I have had some difficulty
trying to determine why you have combined these two things in the same bill.
They are two different things, are they not? You could have proceeded with the
improvements to the GST which apply to all provinces in Canada independently of
this special thing for the three maritime provinces.
Ms Ruth Dantzer, Director, Sales Tax Division, Tax Policy Branch, Department of
Finance: In terms of the context, you will recall that the government wanted to
replace the GST. I would not call what we have done in the charity sector "tinkering"
with it. The changes that are proposed, and were proposed in April,
significantly alter how the system works. We have changed the accounting for
those charities. Those changes were not contemplated four or five years ago. As
the tax started to operate, we began to receive quite a few representations
that it was not working as it was intended. By and large, the changes in those
sectors fundamentally change how the tax is working.
Mr. Drummond spoke about the notional input tax credits, but there have been
some changes in the charity sector and the health care sector. There are some
tinkering changes, but it fundamentally changes how that tax works. In concert
with harmonization, we now have a new tax.
Senator Angus: In your opinion, it is good to have both in the same bill,
namely, the things you described in Part I and the harmonization? They seem
like totally different things to me.
Mr. Drummond: There is a common theme, namely, the improvement of the GST. The
report from the House of Commons finance committee recommended three aspects:
first, that we try to achieve a harmonized value-added tax; second, that there
be certain simplifications and improvements within that; and, third, that we
incorporate tax-inclusive pricing. In their terms, these are the three aspects
regarding improving the overall tax system. That is what is reflected in this
There is an overriding umbrella to that, and this is a mechanism for improving
the overall tax system. There are specific changes, obviously, but improvements
on the other aspects apply right across the country.
Senator Angus: Is it not a fact that you could have proceeded with the
improvements, as you call them, and the fine-tuning of the GST legislation,
which is working just fine, as Ms Dantzer stated? In other words, it could have
been done in a separate piece of legislation.
Ms Dantzer: Business was fairly clear in terms of telling us that the major
complexity with the GST was the operation of two taxes at once. That certainly
came out in the House of Commons report. The major complexity for those
businesses was the fact that they had to comply not only with the GST but also
with at least one provincial tax.
If the overview was to create simplicity and eliminate overlap and duplication,
many of the measures in Part I address that. For example, where charities are
off the list, they need not be involved.
Senator Angus: What is the new threshold on charities?
Ms Dantzer: It is $50,000.
There are more than 2 million registrants out there. How do you achieve
simplicity? There was a some consultation. They all said they were operating at
least two tax forms, and many provinces operate more than one so they have two
or three or four tax forms to fill out for sales tax. The key to obtaining that
simplicity for business was clearly in terms of harmonizing the taxes. They fit
together in terms of simplicity, overlapping and duplication, and trying to
have it simple for the registrant to comply.
Senator Angus: I put it to you that, because agreement was only obtained with
three provinces, namely Newfoundland and Labrador, Nova Scotia, and New
Brunswick, it is entirely unsatisfactory to proceed with only those three
provinces and not the other ones. I realize that Alberta might be a special
case and that Quebec was already in on another basis, but it would have been
better to wait on the harmonization aspect and treat it altogether. The way you
are proceeding is creating more confusion, more overlapping, and more of an
administrative nightmare. I would appreciate having your comment on that.
What was the big rush in proceeding with these three provinces only and not
waiting for the other provinces until you had a complete deal done?
Senator Lynch-Staunton: The Red Book promise.
Mr. Drummond: Let me deal with few aspects. First, there is the aspect of
severing the two aspects of the legislation.
Many sections in the act are changed by both Part I and Part II. It could be
confusing for a legislative body to consider the two concurrently because you
would be getting one change from one aspect and one change from the other. That
involves properties brought into a province that are affected by the
harmonization arrangement but are also subject to the change in the
simplifications. At a minimum, they would have to be done sequentially -- one
would need to be considered before the other one could start.
Why was it was done with the three provinces? We did put forward an offer to the
provinces in 1994. That was almost three years ago. We had discussions with
virtually every province. Various degrees of interest were shown at various
times. The three of them felt prepared at this time to sign an arrangement.
They were anxious to proceed then, and they have been anxious to start this as
soon as they can. They see great benefits to their provinces, and they have
indicated them in their documents. They also see benefits to their consumers
and their economies in terms of getting off the embedded tax from their
manufactured and transportation products and so on. It would not be fair for the
federal government to tell them, "We will deprive of you those benefits
while we continue discussions with the other provinces."
To be perfectly honest, at the moment there are no active discussions with the
other provinces. It became a point that, yes, we would like to have added
others, but you cannot keep telling the Atlantic provinces, "We will keep
putting you aside and deprive you of the benefits."
Senator Angus: I appreciate how you have addressed your response, but would it
not have been better to have this harmonization in a separate piece of
legislation? It would not have held back, inter-meddled and confused these
improvements to the excellent piece of legislation on the GST, which was
already in place and functioning well.
I do not fully understand the scheme of the legislation. You have three
provincial acts, two of which have been passed -- in New Brunswick it is before
the legislature -- and the federal act. You then mentioned that on April 1,
everything will start happening. In contemplation of that, moneys have already
been advanced. For example, if an election were called and this bill was not
passed by April 1, what would be the effect? Technically, I need to understand
Mr. Drummond: I will go through a more generic response first.
Many changes in the Income Tax Act and the Excise Tax Act are administered by
Revenue Canada on the basis of a notice of ways and means motion. Would this be
implemented and administered on the basis of a notice of ways and means motion
without Royal Assent? I do not think so.
This is a substantial tax change -- not only the improvements but also the
harmonization. There are aspects of it which are quite new in the domain of
taxation such as the taxation of interprovincial sales.
From a technical perspective, as a bureaucrat, I would say that if it is not
given Royal Assent by April 1, it will not be implemented for April 1. It will
not be implemented until it has Royal Assent. This is not the type of
legislation or tax change I would be comfortable asking Revenue Canada to
administer on the basis of a ways and means motion.
Senator Angus: Is that the generic answer, or the answer?
Mr. Drummond: The generic answer is that we do that type of thing all the time,
but the specific answer is that I do not think this is an example of one that
you would do on a notice of ways and means notion. Getting down to the
technical level, that would require that those provinces continue their current
sales taxes. I am sure they do not want to forgo the revenues they would earn
Senator Angus: We are told that this is a revenue bill. Do you subscribe to
Mr. Drummond: Yes.
Senator Angus: Yet the Department of Finance is handling it.
Mr. Drummond: I thought that when you said "revenue," you were
referring to flows of revenue. Are you referring to Revenue Canada?
Senator Angus: Is it flows of revenue or just shuffling around? Will there be a
net increase of income to the government?
Mr. Drummond: No. In fact, there will be a net reduction of income because it is
a substantial reduction in the tax rates of the Atlantic provinces -- almost 4
percentage points in Nova Scotia and New Brunswick and almost 5 in
Senator Stewart: You referred to putting certain features of tax legislation
into effect on the basis of a ways and means motion. What is the statutory
authority for doing any of that?
Mr. Drummond: Other than longstanding convention, I am not sure.
Senator Stewart: So it could be challenged in the courts.
Mr. Drummond: Yes.
Senator Angus: As to this being a revenue bill, I believe you have now confirmed
this is not a net revenue coming in but it may in fact be a reduction, although
that remains to be seen.
In Newfoundland, they say that it is a decrease from 18.X per cent to 15 per
cent and that they love it. However, when you look at the broadened base of
what is being taxed, the net sales tax dollar in the purse of Newfoundland
might in fact be higher and the people do not even realize that.
Mr. Drummond: The only way the revenue intake would be larger is if it
stimulated a great increase in economic activity. However, to be credible, I
would not want to suggest that that would be the case.
You said that the money had already been paid to the provinces, and I assume you
meant the transitional assistance for that. To qualify for transitional
assistance, it must be demonstrated that the provinces would incur larger than
a 5-per-cent revenue loss. The 5 per cent is defined from the revenues
projected that they would have received if they had continued under the retail
sales tax system vis-à-vis what they would get from harmonization.
Our anticipation is that their overall revenue take from sales tax, their
portion of the 8 per cent, is more than 5 per cent lower than they would have
received under the old sales tax. The reduction in the tax rate far offsets the
expansion of the tax base.
Senator Angus: We talked about the net revenues a moment ago, and you said it
might be less. I read the MOU quite carefully. As part of the so-called
consideration for the federal government being able to enter into this happy
agreement with the three provinces which are so keen to get going with the new
system, there is a small amount of $981 million. As well, it appears that the
federal government has undertaken, vis-à-vis those three provinces, to
take over the entire administration of a flat income tax on the one hand and a
corporate capital tax on the other hand.
Could you give us an idea of the cost of that to the federal government?
Mr. Drummond: Administration of the flat tax and the capital tax is minor. I do
not know exactly what the figure would be, but many other provinces have these.
We have a capital tax as well. Several provinces now have a flat income tax.
The procedure is well known for the provinces. It is an extra line on the tax
form, if indeed the provinces decide to do it. At the moment, they have not
decided to implement the flat tax, but the cost of that would be very minor.
Senator Angus: Would there be a big layoff of personnel in the infrastructure of
the provinces that collect that tax?
Mr. Drummond: For the most part -- not to the full extent, but to a large extent
-- the workers in those provinces working on the retail tax systems are being
absorbed into Revenue Canada to operate the harmonized tax. In a strict sense,
not all of them are required because obviously there is an administrative
efficiency. However, the experience and expertise available gives us an
opportunity to make some further inroads into the underground economy, to
increase the overall audit penetration, and to improve the collection system we
Most of those people are being absorbed into Revenue Canada. Not all of them
chose to be. Some have chosen early retirement or to move on to other jobs.
However, for the most part, the ones who were interested and the ones with the
appropriate skill base are being incorporated so that there is not a job loss
coming from that side.
Senator Angus: Will there be an increased cost to the federal government?
Mr. Drummond: If there is an increased cost, it will be returned many fold by
the amount that someone assigned to collections in these areas will collect.
Senator St. Germain: You paint a rosy picture of this legislation; you seem to
suggest that it is the best thing since sliced bread. You make it sound like
the Atlantic provinces are chomping at the bit to get into this. You imply that
it was their initiative and not that of the federal government at all.
You talked about breaking ground. Was the ground not broken with the province of
Quebec? Why are the other provinces not lined up to get into this if it is such
a good piece of legislation? Why are they all holding back? Do you think it is
a coincidence that three Liberal provinces are chomping at the bit to hold
hands with their colleagues? Could you explain that from the perspective of a
Mr. Drummond: You have posed several questions. With regard to ground breaking,
yes, much of it was sorted out at the time of the harmonization with Quebec,
but not all of it. For example, in the Quebec arrangement, we did not tax
interprovincial sales on behalf of Quebec. That was something the Atlantic
provinces quite rightly laid out right at the beginning. One of their main
interests in harmonization was to eliminate that competitive disadvantage. We
had to sort that out. Of course, with more than one province involved, we also
had to sort out the revenue allocation mechanism, which we did not have to do
on behalf of Quebec.
There are a number of further elements, but there is no doubt that the Quebec
You asked whether this was at the initiative of the federal government or the
Atlantic provinces. I certainly did not intend to suggest that the original
impetus came from the Atlantic provinces. The original impetus came at the
finance ministers' meeting in Vancouver in June of 1994 where the federal
government, for the first time, proffered a proposal which could be a basis for
a harmonization arrangement with the provinces. That, of course, has changed
many times since then on the basis of both multilateral and bilateral meetings.
It was the Atlantic provinces responding to the proposal rather than vice
However, as you can tell from their public documents as well as from speeches
made by their premiers and ministers of finance, I do not think they are
reluctant partners in this in any sense. They have readily embraced the
Why have they embraced it and others have not? I think those provinces which
have not embraced it are probably in a better position to answer that. I can
only repeat the answers they have given to us and the answers they have given
publicly, which are not always exactly the same thing. The one that is most
commonly cited is the notion that harmonization shifts the taxation away from
business and toward consumers, which makes it difficult for those governments.
I say that because I think all of them realize that businesses themselves do
not absorb the taxes. They pass on the retail sales tax to consumers, as is the
case right now, just as the federal government back in the 1980s recognized the
value of putting in the GST to replace the federal sales tax. That was done
because the FST failed in terms of business inputs, which disadvantaged our
business sector internationally.
There is the same problem with the retail sales tax. In many of the provinces,
the bulk of the sales tax falls on business inputs. There seems to be a notion,
at least in what is presented publicly by many of these governments, that the
business sector absorbs that and does not pass any of it on to the consumer.
Hence, as you put in place input tax credits and remove direct taxation of those
businesses and put it on the final consumption points, some of them have billed
that as an increase in consumption and have said, "We will not have that."
I do not think that is the way tax incidence works. I have difficulty believing
that they think that is the way it works. However, that is the spin which has
been put on this by the ones which have indicated thus far that they are not
interested in the arrangement.
Senator St. Germain: Now that certain people in Quebec are asking for the same
type of treatment as that received by the three Atlantic provinces, can you
tell us if this 5 per cent benchmark was arrived at to prevent Quebec from
benefiting as the rest of these provinces have benefited? It seems unfair that
this benefit should accrue to these other three provinces while Quebec, the
first to play ball in this area, is deprived by a benchmark set just high
enough so that they cannot clear the bar.
I am from British Columbia. If we pay, we want to ensure that everything is
fair. If we are to pay, we may as well pay for everyone. However, I would
sooner not pay for anyone. I cannot believe that the government has taken $1
billion of our tax money to try to satisfy a political situation.
Can you tell me how this benchmark was arrived at?
Mr. Drummond: There are a few key parameters to consider. I will go from the
concept to the actual numbers.
In some sense, there is not any particular science to it. The concept was that
we would not compensate for every small amount that might be lost. If someone
was incurring a relatively insignificant revenue loss, we did not want to be
involved in providing adjustment systems. They had to be significant. Of
course, you could say it is easy to say "significant", but you must
put a number to it.
There was no particular science as to why the figure of 5 per cent was chosen.
It struck us as a significant threshold. Someone incurring a revenue loss of 7
per cent or 8 per cent is incurring a large revenue loss. That would strike me
as having put the bar too high. If we were involved in compensating for revenue
losses of 2 per cent to 3 per cent, then those type of fluctuations are seen in
a government's fiscal plan on a year-to-year basis. They absorb those losses.
They can plan around that type of uncertainty. Certainly, the federal
government has seen fluctuations in many of its revenue sources of this type of
magnitude even on a year-to-year basis, and we have been able to continue with
our fiscal planning. We did not want to be involved in providing any adjustment
systems for fairly small amounts of money, and 5 per cent seemed like the right
Further, we decided that there was no basis for doing any permanent
compensation. This should be solely an adjustment assistance. Therefore, we
looked at the revenue losses that would occur over a four-year period. We
determined that since we were partners in this arrangement, we would only share
the revenue cost over that four-year period on a 50-50 basis.
Those numbers were not in any way designed to include or exclude Quebec. They
were designed on a conceptual basis which would apply to any province across
the country. They were not in particular designed to address specifically the
Atlantic situation. They were designed so that they would apply equally in a
fair manner to any other province, whether it was Ontario, Manitoba, or
Saskatchewan. They may or may not qualify as well. If they were interested, we
wanted a robust enough formula that could apply right across the country.
The reality is that Quebec did not qualify for that formula because they did not
have that type of revenue loss when they harmonized.
Senator Buchanan: In your opinion, what will happen in the three provinces after
the payments are completed in four years?
Mr. Drummond: We have given a fixed schedule. We have made some estimates with
them as to what we thought each one of their respective revenues would be over
the four-year period. Basically, we could predate the cheques. We have said
that on a certain date, we will give them a certain amount. We will then do
this reconciliation exercise.
My expectation is that it will net out to zero. The projections were done on the
best possible basis. There is no reason at this point to think that there will
be any difference between what we projected will be due to them and what is due
to the federal government.
If it turns out that we have underpaid them, then over a period of time we will
make up the differences in payment to them. Obviously, that will be an
unanticipated fiscal windfall to them, one that they may have incurred
otherwise if we had the revenue allocation formula up and in place but they have
not been receiving it. If we have not underpaid them but we have been
overpaying them, then over a period of time -- and we will spread it out over
many months -- they will be required to return that money to the federal
Senator Buchanan: What happens if you have not underpaid or overpaid?
Mr. Drummond: Then we will use the revenue allocation formula dictated by the
data supplied by Statistics Canada.
Am I answering the wrong question?
Senator Oliver: Senator Buchanan is talking about the revenue shortfall.
Mr. Drummond: I am sorry, senator. I am answering a question you did not ask.
Senator Buchanan: What will happen if they have a revenue shortfall beyond that?
Mr. Drummond: Obviously, in the first instance, I would have to say that they
are in a better position to address that question than I. They are anticipating
that this will strengthen their economies and, hence, will return some
additional revenues. I would not want to suggest that, in the first few years,
it will be enough to completely eliminate their revenue loss. However, it
should certainly eat into the revenue loss.
With the exception of Newfoundland, obviously, these provinces have gone into a
much better overall fiscal stance in the last few years. As you will have
noticed in the case of New Brunswick and in their budget of December, they
introduced substantial personal income tax reductions which reflect their more
comfortable fiscal balance sheet, both in terms of their deficit and their debt
load. They may be able to incur it within their overall fiscal plan.
I suspect one of the reasons they have asked for the flexibility to put in place
flat taxes and capital taxes is so that if they end with a shortfall they will
have the means to make up for that. They are holding that in reserve and hoping
that through the higher economic activity and their overall fiscal position
they will not need to invoke those types of measures.
Senator Buchanan: Do you have any proof that, if that happened in the past, it
will happen in the future? I have never seen it.
Mr. Drummond: Other than Quebec, which is quite satisfied with the arrangement,
we have not had a harmonization of this nature since.
Senator Buchanan: They do not have the full harmonization that you are talking
The Chairman: Senator Buchanan, I was happy to allow you one supplementary
question to elaborate.
Senator Buchanan: According to those with whom I have spoken in departments of
government in Nova Scotia, consumers will suffer at the end of the fourth year.
The taxpayers of Nova Scotia will suffer.
Mr. Drummond: At this point, the consumers are receiving an almost 4-per-cent
tax reduction. There is an expansion in some areas.
Senator St. Germain: Using that same equation, Mr. Drummond, the province of
Quebec indicates that their loss is $2 billion. When you look at Quebec and the
problems that we have there with unity and high unemployment, is that $2
billion a realistic figure from your estimation?
As my second question, Ms Dantzer made reference to the replacement of the GST.
Can Canadians assume, regardless of any promises, any rhetoric, or anything
that transpired with regard to the GST, that, having taken this step, the GST,
in some form or other, is here to stay forever or for as long as the present
administration is there? Can we assume that the GST will be a permanent part of
our tax system from now on, whatever you want to call it?
Mr. Drummond: Let me address the Quebec question first. Quebec did make the
statement, last spring, that they thought that $2 billion -- $1.8 billion
originally, $1.9 billion now -- of compensation was due to them. After many
months, on December 5, we received the estimates behind that claim. That was
hanging out there for six months during which we had no mechanism to assess it.
Quebec continues to say that we have not provided them with the data and the
details of the formula used for the Atlantic provinces so they could assess our
assessment of their claim. I can categorically state that that is not the case.
We have provided them with every aspect of the data that we used to calculate
the claims of Atlantic provinces. We received the permission of the Atlantic
provinces to do that. Quebec has for many months now received every piece of
data we used to calculate that $961 million.
Previous to Quebec coming back with their calculation leading to an almost $2
billion claim, we made our estimates in which they were not to receive any
compensation because they did not have a revenue loss from the harmonization.
As I mentioned, in the first week of December, for the first time, we received
some details of their calculations. We have gone through that, using the
relevant data from Revenue Canada, Statistics Canada, and data available from
the Quebec Minister of Finance. We have confirmed that Quebec would not qualify
Your question was: Are we comfortable with the statement that, using that
formula, Quebec would not qualify for compensation? I can say unequivocally "yes."
That was our original calculation, and, based on their detailed response to
that and their own calculations, we are still of that view.
As well, they have the full amount of information necessary to see how we
calculated it for the Atlantic provinces.
Whether the GST will be here forever is obviously not for a bureaucrat to
answer. I can say that you have obviously seen a number of years of effort to
reform the GST. I refer back to the finance committee report.
Senator St. Germain: Does this bill further entrench the GST?
Mr. Drummond: I suppose that if something much better came across, everyone
might be interested. I would only refer back to the exhaustive study in 1994 by
the finance committee which recommended this as the approach we should take.
Obviously, the change all of us would be interested to see is further
harmonization. That would be a change to the GST, I would think, as opposed to
a completely different tax base.
Senator Lynch-Staunton: You will notice we have not talked about Part I which
you analyzed earlier. I find this deplorable. I struggled through the act. I
struggled through the explanatory notes. It is impossible for a layman to
appreciate just what is in there. I wonder why that is.
It is not in the original thought. I said at the time of the GST that most
legislation we get is fairly coherent for the layman, but when we get tax
legislation, it is difficult to understand unless you are a professional versed
in this language. Is it not possible have a little more plain English for the
You have heard this complaint before. Why is it the problem persists, even in
the explanatory notes, making it difficult to understand exactly the impact or
the intent of all these amendments? Why do we sit around here without enough
intelligible information from these documents to ask the questions we would
like to ask?
Mr. Drummond: I am happy to answer that because this has been an interesting and
educational experience for me. I have not been in tax policy all my life, and,
coming into it, I heard those comments many times: It is too complex; can you
not simplify it? Since I have been in the tax policy field, I have been
wondering what one can do with that. I found some interesting dynamics in place.
When looking at how some of the most complex sections, particularly of the
Income Tax Act, ended up that way, you find that, in many cases, the very tax
practitioners who are recommending simplification are the ones who caused the
In tax, if the wording is not terribly precise, someone will find a scheme to
get around it because it does not apply exactly to their situation. You can do
it through administrative compliance, but then you end up with many regulations
and interpretation bulletins and more complaints for going that way because it
is preferable to have everything in the legislation.
Unfortunately, in tax legislation, you must envision many specific
circumstances, and, every time a specific circumstance arises which you have
not envisioned, you have a problem.
There is no doubt that we absolutely share your goal. We will work on that, but
our jurisprudence in this area suggests that we must be extraordinarily precise
in writing the legislation. We have had some problems with the GST in the
financial sector and in other areas where we perhaps have not been as precise
as we might otherwise have been, and it has led to some difficulties.
Senator Lynch-Staunton: I do not wish to belabour it this point, but I do wish
you would listen less to the tax practitioners and more to those who must pay
Regarding the agreement with the three provinces, is it fair to say we now will
have in place, if this bill goes through, three approaches to the national
sales tax: one in Quebec, one in three maritime provinces, and one in the rest
of Canada? Is that a fair summary of the situation which will exist after April
Mr. Drummond: No. As far as the business is concerned or as far as the consumer
is concerned, there will be one system operating similarly. In Quebec, Revenue
Quebec is collecting the tax on behalf of the federal government, and you have
one collector as opposed to two in the other provinces. Presumably, that is a
benefit to businesses, rather than a hindrance.
Senator Lynch-Staunton: I am not talking about the consumer; I am talking about
the agreements. The agreement in Quebec does not compare with these agreements
which will affect the three maritime provinces, does it?
Mr. Drummond: They are similar. One aspect which is different is that we have
not yet found a way to address the differences between our tax and the Quebec
tax for the interprovincial sales on behalf of Quebec, whereas we will be doing
interprovincial sales on behalf of the Atlantic provinces.
Senator Lynch-Staunton: Under the so-called harmonization, the federal
government will process and collect the tax. Is that right?
Mr. Drummond: That is for the Atlantic provinces, as it will do on the GST
portion. In Quebec, it will be done by Revenue Quebec.
Senator Lynch-Staunton: Will it continue to be done by Revenue Quebec?
Mr. Drummond: That is right.
Senator Lynch-Staunton: The three Atlantic provinces, under this agreement, in
effect give up their autonomy to set the provincial portion of that tax, do
Mr. Drummond: Under various conditions, if there is agreement, that provincial
share can be changed. Under certain conditions, they can either raise or lower
Senator Lynch-Staunton: It is not that easy, unless I am misreading this
completely. This is written in language which I think I understand.
Ms Dantzer: For the first four years, they are held to a common rate of 8 per
cent. After that time, a protocol has been established for provinces to move
together. No rate decrease can happen between the three provinces unless there
is consensus. Rate increases will be subject to a vote.
Senator Lynch-Staunton: That confirms my interpretation that the provinces are
giving up their autonomy and their jurisdictional resetting of their own
provincial sales tax.
Ms Dantzer: It must be done in concert.
Senator Lynch-Staunton: Yes. If New Brunswick, Nova Scotia, or Newfoundland
decided for their own purposes that they wanted to increase their own
provincial sales tax, they could not do so without the approval of one or more
of those involved in the harmonization agreement.
Ms Dantzer: They could move out of the agreement as it is now structured.
However, part of the agreement, in terms of maintaining simplicity for business
and to have a common set of rules across Canada, is that they move together. If
they give six months' notice, they can get out of the agreement and go their
Senator Kenny: On this subject, did the provinces not enter into this
voluntarily, and are there not advantages to the provinces having some
commonality in their sales taxes when consumers are moving from province to
Mr. Drummond:The advantages are not only for the consumers, but also for the
businesses which face one administrator and one common rate. In order to
operate interprovincial sales, we needed a common rate as well.
There is no doubt that provinces have been tightly united since the beginning in
the view that they should have a common rate across the three provinces.
Senator Kenny: This was not a case of the federal government removing some
autonomy that the provinces had; this is something they entered into freely.
Mr. Drummond: As evidence of that, we have offered in the discussions with the
other provinces that they could harmonize at a rate other than 8 per cent. It
would be the perfect world if we all had the same rate across the country, but
some provinces already have 7-per-cent sales tax rates. We have not said to
them that they must raise their 8 per cent to come into the deal. They can
harmonize at their 7 per cent rate.
Senator Lynch-Staunton: I am not suggesting the provinces entered into this
blindly. I am simply trying to find the implications of their coming to this
I find it disturbing that any province which is so jealous of a jurisdiction
would, in return for a short-term financial gain, give up jurisdiction over a
major source of revenue. The federal government, as I understand it, can
increase its portion of the tax without provincial approval. There seems to be
a disparity here where the province is at the mercy of its partners but the
federal government, in return, need not have its partners' approval to move its
portion of the HST.
Ms Dantzer: The three participating provinces have considered that. The sales
tax rates in Canada have not moved that much. It was limited to the extent
that, as part of the agreement, the provinces decided that increased
flexibility on the income tax side would be as valuable to them as a decrease in
the flexibility they currently have in the sales tax side. It is true that,
with this agreement, their flexibility on the sales tax side is somewhat
diminished, as is the federal government's, since provinces must move together.
The federal government does not have an unfettered right to increase its sales
As part of the protocol, we have agreed to maintain the distance in terms of a
1-per-cent point difference between the rates. The federal government is
allowed to move their rate, at the most, 1 per cent. The protocol is that if we
decide to move, we can only move the first half point, and we then offer the
other half point to the provinces.
A major concern with the provinces was the idea of tax competition. They have
given up three or four points of their tax room, and they did not want the
federal government moving into that room since, there being only one federal
government, we can move more quickly than three provincial governments. That
has been taken care of in the protocol agreement. Both the federal and
provincial governments are equally constrained by cranking up the sales tax
Senator Lynch-Staunton: That is a good answer. However, the point I am trying to
make is that the federal government is now being allowed more flexibility in
the establishment of a harmonized sales tax than the three maritime provinces.
They have be required to move in agreement with each other, whereas the federal
government, despite these limitations, can move alone.
Where Canada proposes to increase a tax rate under the CVAT, notice shall be
given to that effect to the provinces. All the federal government must say to
the three participating provinces is, "We are moving by that 0.5 per cent."
However, when New Brunswick or any province says, "I want to increase my
portion," they must go and see, depending on how many are participating in
the agreement, one or two neighbours to get their approval.
Ms Dantzer: That is right. However, once the federal government has moved that
half a point, or that first full point, they cannot move again. They do not
have the right until the provinces move themselves.
Senator Lynch-Staunton: To move again.
Ms Dantzer: The provinces move first. Any sale tax increase under this proposal
is limited to a 1-per-cent increase in the next four years. That could be taken
by the federal government, but it must offer that half point to the provinces.
When you meet the provinces, they will reiterate the fact that it is rare that
one of those three provinces has a need for revenue outside of the other. Their
economies do move together. The provinces do not feel that this will be a
constraint to the extent that their economies operate similarly.
Senator Lynch-Staunton: However, the provincial sales taxes in the Atlantic
provinces are not uniform across the provinces.
Ms Dantzer: No.
Senator Lynch-Staunton: What happens if the provinces or the federal government
feels the need to decrease the tax?
Ms Dantzer: Decrease needs unanimity. It was felt that no other government
should be able to impose on another government a rate reduction.
Governments count over the fiscal plan for certain revenues. For instance, if
Nova Scotia wanted to move the rate down, they should not impose that onto
other provinces or the federal government. Therefore, rate decreases need
Senator Lynch-Staunton: Are you referring to decreases among provinces or a
decrease in the GST?
Ms Dantzer: We could decrease the GST because that would simply reduce the
overall rate. We are not imposing a rate reduction to another government. We
would plan for that. We can do rate reductions by ourselves.
Senator Lynch-Staunton: You can increase it by yourself up to 1 per cent.
Ms Dantzer: It is by 0.5 per cent. The difference can never be more than the
point which currently exists.
Senator Angus: Along the same lines, what would happen if there were a new
government in Newfoundland which decided to abrogate the legislation? Is this a
case where one legislature has bound the future one, or, indeed, could a
provincial legislature abrogate the act without the consent of the other two
provinces? What would happen in that circumstance?
Ms Dantzer: Of course it can happen. You would need a transition period. Part of
the concern with the provincial governments is that, as they lose their
administrative capacity, they cannot just turn a switch and suddenly have
auditors out in the field again. There is a time frame in which they can give
notice and move out of the agreement.
The agreement says that for those who are participating, these are the rules by
which they are participating. It is an on-off switch. Governments can move into
new agreements and abrogate agreements. This has no binding impact on a future
government, except to the extent that, once the transition has happened,
business have been very clear about change for change's sake.
Senator Lynch-Staunton: Is this agreement between Canada and the three provinces
what the government would like to see applied to all its harmonization
agreements across the country?
Ms Dantzer: Yes. That is the basis for harmonization.
Senator Lynch-Staunton: Including having a majority of provinces approve an
increase in the provincial sales tax?
Ms Dantzer: The agreement specifies that once more provinces join, the protocol
would be re-evaluated. It is written in so the majority can do that.
The concept that the federal government cannot move by itself and that it is a
partnership between the provinces and the federal government is a concept which
we would want to cross with any new harmonization.
Senator Lynch-Staunton: In Quebec, the two taxes are separate. Each one can move
in any direction without the approval of any partner or any province.
Ms Dantzer: That is correct.
Senator Lynch-Staunton: That is different from the Atlantic provinces.
Ms Dantzer: No question about that.
Senator Lynch-Staunton: The Atlantic provinces are giving up jurisdiction. They
are giving up a basic right of taxation. They need the approval of others to
make any changes.
Mr. Drummond: The dynamics are different. It is not just federal-provincial
dynamics that are involved in this case; it is the Atlantic provinces dealing
with each other. They did not want to establish tax competition amongst
Senator Lynch-Staunton: Are we establishing tax policy on a regional basis now?
Are we saying that this is good for the Atlantic region and that we will have
another one for Quebec and another one for Ontario? Will the regional concept
extend to tax policy?
Ms Dantzer: The difference between that agreement and the Quebec agreement is
that there is a tax policy committee created which will meet at least three
times a year. For the first time, provincial governments will have a direct say
in terms of how they want the base to change. Quebec does not have that now.
They have operated as a separate system. We have often been surprised at what
has happened in their budget. This will not happen with the new harmonized tax.
In the legislation, in the agreement, we are committed to having meetings with
the participating provinces so they can suggest base changes and administrative
changes. This is not currently happening. That is a structural difference with
this agreement. It is a partnership. It is only the protocol for any
differences. There are several levels, the final one being a meeting of
ministers trying to decide on a change in the base. It can be suggested by
Newfoundland, Nova Scotia, or New Brunswick, as well as the federal government.
We are committed to working in that policy environment.
Senator Lynch-Staunton: The terms CVAT and PVAT appear in the agreement. They
are both value-added tax. One would be Canadian and the other provincial. These
terms do not appear anywhere else. They are not in Bill C-70. They are not in
the explanatory notes. They are not in all the memos and guidelines we
received. Why do they suddenly appear here? Why do we not use PST and GST,
which is what they are today?
Ms Dantzer: The terms were used because we were working through the agreements
and the name had not been chosen. It was really a Canadian VAT.
Senator Lynch-Staunton: These are the new names for the two taxes which are
being blended into the HST?
Ms Dantzer: The HST really represents the CVAT. This was at a very early stage,
as you can imagine. We were doing these agreements in March and April, and we
had to determine what would be considered the Canadian VAT versus the
provincial VAT. There is no secret message in there. We were trying to be
Senator Lynch-Staunton: It is difficult to keep up with all the terms.
The Library of Parliament analysis entitled "Harmonization of Sales Taxes"
indicates that, in Quebec, it was expected that fewer than 500 employees would
be needed to administer both taxes. In December 1992, Quebec admitted that
administering the GST and the TVQ would cost $100 million and necessitate the
hiring of 1400 civil servants.
Since the federal government must pay a portion, if not all, of the
administrative portion of the collection of the GST, does it have a say in the
expenditure side of its so-called partner in Quebec?
Ms Dantzer: We do have a ceiling on the funding that is provided to Quebec. That
ceiling is established by what is called the "Canada ratio". We took
the average of what it cost us to administer across Canada, and that is the
ceiling we used for the Quebec agreement.
Senator Lynch-Staunton: It is not an agreement; it is a memorandum of
Ms Dantzer: To that extent, there is a ceiling. Quebec could decide to hire many
more people, but they would not necessarily be paid for that.
Senator Lynch-Staunton: How much does it cost now to collect the GST, in direct
costs? How many employees are involved? What is the budget for that section
Ms Dantzer: You will have to ask Revenue Canada. I understand they will be
Senator Hervieux-Payette: The subject being quite complex as it is, I will be
asking my questions in French. In the interest of our understanding and
especially of communication with my colleagues from Quebec, and given that
there are various numbers here, could you give us the amount of tax collected
in Quebec before harmonization and the amounts collected now? I would ask that
you supply us with an official document, taking into account compensation paid,
because we know that there are rebates. This document would be very useful to
us in our discussions, in Quebec, and it could perhaps serve to reassure
Senator St. Germain. We have approximate numbers according to which $4.8
billion in sales tax accrued to Quebec before harmonization and that right after
harmonization, taxes collected jumped to $5.7 billion. However, since I do not
wish to invent numbers, I would like to have some precise data as of the
policy's inception. That is the purpose of my special request.
But my question for you is the following. In Quebec, we are of the impression
that we are paying a tax on a tax. In the case at hand, is there a simpler
formula such that we would pay 7 and 8, rather than having a tax applied to
another tax? I would however say in passing that in Quebec the tax paid is
lower than that which will be applied in the Maritimes.
Mr. Drummond: The best way for us to give you these numbers for Quebec would be
for us to send them to the clerk, who would then provide them to you. We should
be able to do that quite quickly. As to the question of an 8-per-cent tax being
applied to the 7 per cent, the answer is no; the tax will be applied at a rate
of 15 per cent. The consumer will not pay 15 point something but 15 per cent
Senator St. Germain: In Quebec, is there a tax on a tax?
Ms Dantzer: Yes.
Senator Hervieux-Payette: That makes things even more complicated when one tries
to do the calculations in one's head.
Mr. Drummond: It is a little difficult to calculate.
Senator Hervieux-Payette: You really must use a calculator, because there are
decimals. I find it to be extremely complex.
If I understand correctly, in Quebec, we do not have the same base; we have
exempted certain goods that are taxed at the federal level but not at the
provincial level. Services for example?
Mr. Drummond: Yes. There are few changes between the basis of the federal
calculation and that of the Quebec calculation, but there is no difference
between the basis of the federal calculation and that of the three provinces.
As to the other point, namely the difficulty in the precise calculation of the
tax, I would simply like to add that this will no longer be necessary in the
Atlantic provinces, because the prices will include the tax. If the consumer
wants to do the calculation, it is his or her choice, but it is not necessary.
The consumer will know what the total price is, including the tax.
Senator Hervieux-Payette: As to the other question, I do not need an answer
right away. You could send it to us later. I would like to know what revenue
the sales tax represents compared to the Atlantic provinces' revenues. In other
words what the amount is now and what it will be with the new formula.
Mr. Drummond: We should be able to provide that as well.
Senator Hervieux-Payette: Fine.
Senator St. Germain: The committee will be receiving that information?
Senator Hervieux-Payette: I am not demanding that it be supplied today, but I
think it would be important for us to have this information. Perhaps it could
be found in the documents I have received, but the pile is so high that I have
not been able to sift through it all.
I now have a rather bizarre question. There has been much talk about having the
amount of the tax appear on the cash receipt, and I have been told that would
cause some problems, with cash registers, et cetera. Europeans are probably
very discrete people, who do not like to say what the amount of the tax is.
When I travel in Europe, I see a price, I pay it and I come home. It is always
my privilege to claim it at customs. It is there that I discover that the tax
on the clothes that I bought was 18 per cent, that the tax on my butter dish
was 10 per cent. I find that this just does not make sense and that it should
be the reverse, but in the end, in Europe, there are all sorts of percentages
that apply. It is much more complex that it is here. Therefore, there are
several hundreds of millions of individuals in Europe who do not worry about
the transparency of the tax whereas for us, it is of great concern.
We know that you are worried about this issue; we see it in the polls. But is it
absolutely necessary? If everyone paid the same amount and the same
percentage... then why complicate things? Especially when you know that it is 7
per cent for one and 8 per cent for the other and that whenever budgets come
down everyone talks about it, and that the tax will appear on each and every
I am trying to understand the rationale behind this. Psychologically, is it more
of a problem for us to understand it? Once the taxes have been harmonized, once
all of the rates have been put at the same level and that there is only one
rate for one region, then I fail to see the purpose of having the famous 15 per
cent appear on the bill, when everyone knows that it is 7 plus 8. Perhaps you
have some answer to give me? Are there studies I have not seen? I have not seen
any clear answer in your polls.
Mr. Drummond: Consumers want to know how much tax they are paying. We are able
to calculate it, but it is not everyone who is able to calculate what a
15-per-cent tax amounts to. It is not easy when it is $10, but it is even
trickier when it is $11.50. The consumer wants to know the amount he or she is
paying, but he or she also wants to know what the price is with the sales tax
As I was saying, they are satisfied to see the amount of the tax as a percentage
or as an amount at the bottom of their receipt. We talked about the suppliers
of cash registers to retailers, and they told us that it is not a very
complicated thing to have a cash register produce receipts that give that
information. Given the level of detail that we are requiring, most retailers
will be able to comply without incurring any great costs.
Senator Hervieux-Payette: That is your opinion. You did not do any scientific
studies on that. As I was saying, either one is a masochist and wants to know
everyday how much tax one is paying, knowing full well that there is no way of
getting around it, but you did not ask the question in a very specific way in
your poll... In other words the overall price including the tax. With each
budget, the minister repeats that consumers are paying 7 and 8 per cent.
My understanding is that there have not been any studies done on this, namely,
with harmonization, the inclusion of the tax in the price, the way it is in
most countries that have a value-added tax. They include the tax in the price
and they simply collect it. But I do not see the purpose in being so
masochistic and in wanting to know that on this or that item I paid $1.50, $15
Mr. Drummond: It is necessary for the retailer to identify the amount of the
tax, because they need this in order to make their tax remittances to Revenue
Canada as well as to apply for input tax credits. And if it is necessary to
calculate it, then why not show it to consumers, because most people want to
know how much they are paying.
Senator Hervieux-Payette: That is your opinion, but you have not done any
studies on that.
Mr. Drummond: That is the result of our poll. People want taxes to be included
in the price, but they want to know the amount of tax that they are paying.
Senator Hervieux-Payette: Mr. Chairman, personally, not only do I not believe
that but, secondly, I have been paying excise tax on all sorts of goods for
years, and I have absolutely no idea of the amount that I have paid. There are
all sorts of tariffs that are never explained to consumers. What I am saying is
that if it were simpler, I would even be prepared to include it in the price. As
far as collection is concerned, you have been collecting taxes for a long time
without the amounts being indicated, so I really do not see the point of that.
Senator Meighen: Mr. Drummond, you mentioned a poll. Do we have the results of
these polls, of all these polls that you have mentioned?
Senator Hervieux-Payette: Yes, yes.
Senator Meighen: Did you use other polls?
Mr. Drummond: No, the results of the poll were published two weeks ago, I
Senator Buchanan: I am intrigued. Why did this happen last October? Why did a
national harmonization tax, which was the reason for all of this, turn into a
tax for 2 million people out of a country of 30 million people? Why the rush?
Why could the government not have waited until either a majority of Canadians
agreed or all of the provinces agreed? Why the big rush to do this now?
Mr. Drummond: It was not for lack of trying, as you well know. There was an
agreement with Saskatchewan at one point, but it was reversed following an
election. There were intensive discussions with many other provinces,
particularly Ontario and Manitoba. We had three provinces ready. The theory
which has some relevance is that if we can get it up and running, we can break
those grounds which need to be broken and make the deal. We can show that it
can run well. Perhaps that will be of greater interest to others and will
enhance the ability to have more of a national harmonized deal.
Senator Buchanan: Is it reasonable to have a harmonized tax in three provinces
representing 2 million people out of a population of 30 million people? Is that
eliminating the GST? I do not believe so. No one believes that. In fact, in the
Atlantic provinces, they do not believe that at all. If that is the case for
the Atlantic provinces, in Prince Edward Island a Liberal government said "no"
and then a Tory government said "no". Why did Prince Edward Island
say, "This is not good for Prince Edward Island, and we will not enter
into it," yet three provinces did?
Mr. Drummond: I will not cite the reasons for Prince Edward Island. They did not
give us any substantive reasons.
Senator Buchanan: They held a committee of the legislature. I have their report.
Mr. Drummond: There was nothing in the agreement per se with which they were
disagreeing and nothing that it had to be this way or not at all. I cannot
answer that question.
The Atlantic provinces do not have a well-developed manufacturing or
transportation base. Perhaps part of the reason for that was a result of the
high indirect tax burden on those industries. Consider what removing the retail
sales taxes will do for those manufacturing industries and the input tax
In a sense, you are right that it is not removing the GST, but it is removing
the provincial sales tax from them. It will greatly enhance their productivity
and their competitive position.
Senator Buchanan: I have been restricted on how many times I can ask questions,
so I want to get at this now.
Why would the Minister of Finance in October pay each province by giving them
cheques in advance of April, 1997? The Auditor General called it an accounting
trick. He said it was wrong to do that. Why was that done?
Mr. Drummond: There are two aspects to that. Concerning the timing of the
payments, there are things which they must set in place. They must have their
legislation. They are now in the process of dismantling their revenue
administration, and they are incurring costs up-front. They need the certainty
that money will be forthcoming to absorb those costs. They are absorbing half
the revenue loss, and this simply covers half of the other revenue loss. The
point by the Auditor General was solely in terms of the year it was booked. He
has not said the transitional assistance was a trick. The arrangement, the
MOUs, came right at the end of the fiscal year, and there was an argument put
forward by the Auditor General that it should have been reflected in the 1996-97
fiscal year rather than in the 1995-96 fiscal year. He confined his remarks to
Senator Buchanan: Do you agree or disagree with our municipalities in Nova
Scotia, the union of Nova Scotia municipalities, and the largest municipality
in Canada, Halifax Regional Council, when they say that because of this
harmonization, municipalities in Nova Scotia will be in debt by approximately
$12 million? Furthermore, the Halifax Regional Council, led by Mayor Walter
Fitzgerald -- and agreed to by all his council -- will experience a shortfall in
the range of $4 to $6 million, even with the rebates? The only way they can
handle this situation is to absorb it, increase taxes, or cut services. Do you
agree or disagree with the people from our municipality?
Ms Dantzer: The 7-per-cent rebate which the federal government provides to
municipalities has remained unchanged. Therefore, any effects of the
harmonization result from the 8-per-cent provincial tax.
Senator Buchanan: That is right.
Ms Dantzer: The provinces have been clear. Nova Scotia's decision to match the
federal rebates was based on their very precise calculation in terms of what
would happen to those municipalities. Those provincial governments have more
than just the rebate in terms of being able to address the situation. They have
programs that go to those municipalities.
The detailed analysis has been done at the provincial level. My understanding is
that the provincial governments have that analysis. They were certainly not
looking at that level. However, I should leave the provincial governments and
the province of Nova Scotia to respond to the net take.
It is difficult to talk just about the rebates because most of those provincial
governments have looked to a much broader table of programs that they can use
with those municipalities to offset any additional costs.
Senator Buchanan: If that is the case, in order to avoid municipal tax increases
or cutbacks in municipal services, the provincial governments will make up this
loss to the municipalities; is that right?
Ms Dantzer: Going back to an earlier question about the loss of autonomy and
flexibility for these provincial governments, this is another example where the
province has quite a bit of flexibility in how to deal with many of these
areas. All the provincial governments were concerned about the municipalities.
I suppose it would be up to each province to determine how they will treat that
Senator Buchanan: Has the government of Nova Scotia the responsibility to ensure
that there will be no municipal tax increases in all our municipalities?
Ms Dantzer: I do not think I said that. I said that it was up to the provincial
government to determine how to react to any impact that the harmonization would
Senator Buchanan: In other words, they will have to make up the loss.
Ms Dantzer: No, they take the decision on how that loss will be treated. I would
not want to say that the federal government requires provincial governments to
ensure that every sector remains whole.
Senator Buchanan: I have the answer; that is fine.
The Chairman: So the witness can be calm, Senator Buchanan gave an
interpretation of your answer. What you said was what you said, and his
interpretation is just that. In fairness, I do not believe he was putting words
in your mouth.
Senator Buchanan: Are you aware that the Department of Finance in Nova Scotia,
to the chagrin of the premier and the government, came out with a figure last
December which showed that the new HST will cost the consumer of Nova Scotia
some $84 million to $100 million? That is an estimate. We all know that the
result of any estimate made by any department will always be higher. Do you
agree with that?
Ms Dantzer: If you go back to their full study, you will see that that number
was taken out of context. It addressed no pass-through of consumer savings at
all. Part of this addresses the issue that this sales tax change for those
provinces was seen as a much bigger tax policy change. In the province of Nova
Scotia, you will know that they announced several different changes to their
income tax rate. If you take those changes in concert with a reasonable
approach to pass-through, I think they say it is more like a consumer gain of
$35 million per year. APEC confirmed that recently by saying that it is
Senator Kenny: For clarification of the committee and for the public reading the
record, would you describe what you mean when you say "pass-through"?
Mr. Drummond: I opened that line of thinking earlier when I was asked about the
reasons some of the other provinces are giving for not harmonizing. Right now,
anywhere from 40 per cent to 50 per cent of the retail sales taxes in most
provinces is levied on business inputs. That does not go to the final consumer;
it is levied on the equipment and the supplies of the business.
Technically, Nova Scotia, in that study, showed that businesses just absorb that
-- that they do not say, "I have a $10 tax burden on this thing which I am
selling you for $100, and therefore I will raise the price to $110." We
all know that is not the way it operates. Businesses pass those on to consumers.
As you remove that tax burden, there is obviously an opportunity for businesses
to lower those final consumer prices as a result of the lower costs. In the
original study done by Nova Scotia, they did not assume any of that happened.
One could debate, perhaps, that a small portion of it may be absorbed by the
business. However, it is extreme, to say the least, to assume that all of it is
absorbed by the business. We have some test cases. You do not often get test
cases in economics. However, we have a test case involving the introduction of
the GST. The federal sales tax fell heavily on business inputs. When the GST was
introduced, it was predicted that certain prices would fall because of
businesses passing the benefits through.
I know there was some scepticism at the time. There was the belief that
businesses never pass anything through. The argument was that competitive
pressures will force them to do so, and that is what happened.
Senator Kenny: In order to understand you correctly, in spite of the study to
which Senator Buchanan has referred, the consumers in the province are likely
to be paying less at the end of the day?
Mr. Drummond: Definitely.
Senator Buchanan: Why did the Department of Finance not say that at the time?
They stuck with the figure of $84 million.
Mr. Drummond: The Department of Finance would have to answer that question,
senator. They seemed to move very quickly afterwards to correct some of the
faulty assumptions they had made in that study. Subsequently, they released a
study showing the savings.
Senator Buchanan: As I understand it, under this new HST, the provinces have the
ability to exempt certain services or goods or give provincial rebates of 8 per
cent; is that not correct?
Ms Dantzer: The provinces have signed on to a common base. If they wanted to
have a certain service exempted, their first approach would be to come to a
meeting of the tax policy committee which is held three time per year. They
could suggest that policy change at that time. If that were successful, it
would be a change. We would hope it would be a change across Canada.
The second option would be that if it is an issue, for example, that
Newfoundland wanted to provide a rebate or decided that they did not want to
tax some particular item of clothing, they could always provide a rebate
through either the income tax system or a specific goods or services rebate
which they would operate through their own administration. They have committed
to a common base.
Senator Buchanan: In other words, if the government of Nova Scotia decided it
wanted to give a rebate on books, for instance, which they have agreed to do,
and other services, then the government of Nova Scotia could do so. It is the
consumers of Nova Scotia who will be hardest hit by this -- seniors and low-
and middle-income people. They may say to the consumers, "We know your
power bills, your home heating bills, your clothing bills, and your children's
clothing bills will be 8 per cent higher. We know gas at the pump will be 8 per
cent higher. We recognize all this, but we will make so much money off this HST
that we will rebate that to you, the consumers of Nova Scotia." They can do
that, can they not?
Mr. Drummond: You probably do not want me to do this, but I must address some
other aspects of your question as phrased.
The consumers are not being hard hit as a result of this. There is a reduction
in the overall consumption taxes they will be paying.
Senator Buchanan: Where is the reduction? I am told that it comes in what are
called the big-ticket items: stereo consoles, refrigerator freezers, and
automobiles. I checked around Northwood Manor and places similar to that, and
people have not bought refrigerator/freezers for 10 years. Most people do not
buy refrigerators/freezers for 15 years.
The Chairman: In fairness, Senator Buchanan, although you and I would know where
the Northwood Manor is, I have some sympathy for the witness who probably does
not know where it is. Clearly there has been a reduction on anything on which
the PST is paid. That seems to me to be self-evident. As best as I understand
the Nova Scotia tax base when you were premier, it was substantially larger
than just big-ticket items. Having said that, I am happy to let the witness
answer the question.
Mr. Drummond: You basically gave my answer.
Senator Buchanan: What you just said is not correct.
Mr. Drummond: It is absolutely true that there is some base broadening and that
people will pay more on some aspects. However, on everything that is now taxed,
the rates will go down, and, in the case of Nova Scotia, by almost 4 percentage
Senator Buchanan: On what goods?
Mr. Drummond: On almost everything that is taxed -- whether dish soap, a man's
suit, shoes, or socks. Obviously, as you go down the list of things, the
largest amount of tax you pay is on some of those big ticket items, but they
are not the only items on which tax is going down.
Senator Buchanan: What about electricity? What about power bills, which have
always been a problem in Nova Scotia?
Ms Dantzer: Initially, Nova Scotia in fact introduced a tax on electricity. They
have a 1 or 2 per cent tax currently on electricity, and they have started to
move. In Nova Scotia, that bridge has been crossed.
The point of broadening the basis is so that they can get a lower rate.
Senator Buchanan: How can you get a lower rate if, on April 1, power bills will
go up in Nova Scotia?
Ms Dantzer: All provinces were given the option, and we broke out what it cost
to exempt some things. Those issues are not new in terms of home heating fuel
and the rest. To maintain their revenues and exempt those types of sensitive
items, the rate would have to go up on everything. They could not maintain 8
per cent; it would go up to 9 per cent. The provinces were fairly clear that
they could not go higher than a 15 per cent combined rate if they were to keep
the base whole.
When you ask why everyone is not jumping in to harmonize, the first offer put to
the provinces was in terms of harmonizing at whatever rate you are at now.
Newfoundland and Nova Scotia and New Brunswick were unequivocal in saying they
could not see taxing home heating fuel at 19 and 20 per cent effective tax
rates. The rate had to get down to 15 per cent, at least.
Senator Buchanan: If the HST had not gone through, there would not be an
increase in power bills, home heating fuels, gasoline, or certain clothing;
The Chairman: There would not be a decrease on all the other items on which the
provincial sales tax is based.
Senator Buchanan: However, those are the big-ticket items. I am talking about
necessities of life for most people.
Ms Dantzer: Each of those provinces are addressing that in terms of either
personal income tax reductions or, in the case of New Brunswick, doing a
family-based credit or, in the case of Newfoundland, with their budget. They
are also considering how to address that. When the provincial governments speak
to you, they will tell you that that has been a concern.
Senator Buchanan: They do not speak to me.
Senator Meighen: I leave to others these very delicate political questions that
I think are particularly delicate for some of our number here. I want to get
back to administrative things, a line of questioning upon which Senator Angus
embarked initially. I refer to the question of one part being the technical
amendments to the GST and the other part being the HST agreement.
I happen to have here something called "Explanatory Notes to Legislation
Relating to the Goods and Services Tax" put out by the Department of
Finance in February, 1993, which is about four years ago.
How many of these 229 technical amendment proposals -- my information would be a
good number, but I cannot give a total, although perhaps you can -- by the
Department of Finance in 1993 were included in Part I, if I can term it that,
of this bill, and why has it taken so long? Were there administrative questions
that had to be resolved, or are they political or fundamentally unsatisfactory
in terms of the bill that is before us now?
Ms Marlene Legare, Chief, Legislation, Tax Policy Branch, Department of Finance:
I believe the proposals to which you refer have all been passed into
legislation. Part I of Bill C-70 simply incorporates the proposals which were
announced on April 23, 1996 or released in draft form on April 23, 1996.
Senator Meighen: All these recommendations of February, 1993 are now law?
Ms Legare: Yes.
Senator Meighen: Thank you. That is helpful.
Ms Legare: There have been two amending bills to the original GST legislation.In
1993 and 1994, there were Bill C-112 and Bill C-18.
Senator Meighen: The one before us is the next one since 1994?
Ms Legare: That is right.
Senator Meighen: Thank you.
Mr. Drummond, you mentioned some proposals received from the Maritime provinces
which are involved in this agreement with respect to simplification of the
regime and some proposals you have already agreed to such as the case you cited
of the magazine store. What about advertising? Is it a purely an administrative
question which you are mulling over in your mind as to whether, for example,
proposals for tax-in, in the store, and tax-out, out of the store, be agreed to,
or are there other considerations that you must weigh?
Mr. Drummond: There are many considerations. As you will discover, there are two
sides to each of them. This is one on which we have received conflicting
representations from the retailers. It is hard to know how to weigh them and
arrive at a conclusion.
I believe you will have before you the Grocery Association, which pressed very
hard that everything should be tax-inclusive. That reduces the consumer
confusion. They and others are worried about a situation where you see a
bicycle advertised for $199.99, but when you go in the store that is not the
price you see on it.
Senator Meighen: What if you said $199 plus tax?
Mr. Drummond: That would be a minimum. It would have to be a disclaimer so there
would not be any confusion over what that $199.99 was. At a minimum, it would
indicate the price and have a note that that does not include tax or that you
had to add tax to it.
Senator Meighen: Does anyone disagree with that, to your knowledge?
Mr. Drummond: You will hear from the grocers and some others. You will hear from
the largest building supply company. I am not certain if they are on your
witness list for Ottawa or New Brunswick. They think that does not go far
enough and that the ad should include the tax-inclusive price. It could show
the tax-exclusive price, but at a minimum it should show both.
Ms Dantzer: The concern at some level is the competitive advantage you give to
those stores and retailers which advertise at a price 15 per cent lower than
the store that does not advertise.
Senator Meighen: What about the competitive disadvantage that some say this
harmonization bill will inflict upon them?
Ms Dantzer: Everyone in the harmonized region will be operating under the same
rules so you have a level playing field at that level.
Senator Meighen: Providing you limit your advertising to that area.
Mr. Drummond: That is where you hear the flip side. If you are on a border
region, some retailers say, "We have ads coming into our area that are not
in the harmonizing area." You will hear both sides of that.
Senator Buchanan: P.E.I. is separated by the Northumberland Strait, but they
could advertize a certain price over there, and Nova Scotia would be a higher
price. I were going to P.E.I. and would pay the $36 to go over the bridge and
back, I would go over there and buy.
The Chairman: The price in P.E.I. would be higher because the combination of the
PST and the GST is greater than 15.
Mr. Drummond: This was another area where we tried to do some testing with the
survey to which we referred and was released a few weeks ago.
The reaction we received was that we are all making too big a deal of this. They
constantly see goods advertised on American television stations. We should not
think that they are not sophisticated enough to know that that is not the price
they will pay. That poll was done by Ekos on behalf of the Department of
The Chairman: I tabled it in the Senate last week.
Senator Buchanan: The polls I saw indicated that a majority of people in our
province are opposed to the HST.
Mr. Drummond: This poll was done on tax-inclusive pricing, not on the entire
Senator Meighen: If everyone were to say, "Let us have one price", or "Let
us have price plus tax", would you take a neutral stand on that, or do you
have a preference from your administrative vantage point?
Mr. Drummond: I am sorry. What was the first option?
Senator Meighen: The first option is to have all tax-inclusive pricing; the
price is the price is the price. The second option is the price plus applicable
taxes; forget about inside or outside. Do you care?
Mr. Drummond: We care to the extent that we want to reflect the desire of the
consumer as it has been made known loud and clear. They do not want to see the
$1.99 plus some tax that requires them to calculate the real cost.
Senator Meighen: Are you sure of that? Are you absolutely sure that that is the
view of the consumer?
Ms Dantzer: Are you talking with respect only to advertising?
Senator Meighen: Let us limit it to advertising for now.
Mr. Drummond: In the store, consumers made it clear that they do not want to see
that the price is $1.99 and have to calculate the taxes. They want to see the
price including the tax. That is coming out loud and clear.
It is hard to get a definitive read on whether they want to see that on
Senator Meighen: The same poll said they did not want to see the GST on it at
all, did it not? They were opposed to the GST. They wanted it changed.
Mr. Drummond: Sure. No one wants to pay a tax.
Senator Meighen: I want to find out whether, administratively -- which is
presumably what the department officials are here to tell us about -- it makes
any difference to you?
Mr. Drummond: If by "administratively" you mean in terms of operating
the tax, no.
Senator Meighen: I mean the cost of collecting.
Mr. Drummond: No, because the tax is submitted to us from the retailer on behalf
of the consumer, so how the price is shown makes no difference.
Senator Meighen: You have no axe to grind other than what you perceive to be the
Mr. Drummond: That is right.
Senator Lynch-Staunton: If there is such a wave of support for tax-inclusive
pricing, why does the government not let the retailers decide for themselves
how authentic that support is? Why should the Government of Canada get involved
in the pricing policy of retailers? If I want to show the tax, let me show the
tax. If I do not want to show the tax, I will not show the tax.
Why should the government get involved unless, as I suspect, it prefers to see
the tax buried and no longer visible day by day and, therefore, the "most
hated Tory tax" would no longer be in existence as the "most hated
Mr. Drummond: I was trying before to emphasize that the tax is not buried. The
tax will be shown on the sales receipt. There is no element of hiding.
Senator Lynch-Staunton: When you look at a catalogue or when you go into a shop
and look in a bin, you see the price that you know you are willing or unwilling
to pay. After you have paid it, you will see the figures and you may be shocked
to see there is a 15 per cent add-on.
Why not let those involved in retailing goods decide what the consumer wants?
That is their job. They are much better equipped than we are to decide that.
They are in the business. Why should it be imposed by the government?
Mr. Drummond: I can only respond again that the poll showed the majority wanted
tax-inclusive pricing and they are not getting it.
Senator Lynch-Staunton: Let the retailers respond to the poll.
The Chairman: The retailers are our next witnesses.
Senator Lynch-Staunton: Why would the government spend who knows how much
supervising this, going into stores and imposing penalties for inadequate signs
and ensuring that the sign for the non-inclusive price is the same dimension as
the sign for the inclusive price? Why get involved in this?
Senator Meighen: I was surprised to hear that everything contained in the
explanatory notes of the Department of Finance of February 1993 had already
been passed. That may well be so, but it has been pointed out to me, for
example, that pay telephone services are affected. Is that a further
amendment?The wording looks terribly similar insofar as it applies to section
165 of the act.
Ms Legare: I do not have the previous amending bill with me. I believe that
provision was previously amended, but I could verify that.
I would repeat that Part I of Bill C-70 is the incorporation of proposals which
were released in draft form and announced April 23, 1996. There were some press
releases prior to April 23, 1996 that were incorporated into the draft
legislation released in 1996. Those are also in Bill C-70. Anything that was
explained in previously published explanatory notes relates to legislation that
had already gone before the house.
Senator Stewart: I want to revisit a question raised by Senators Buchanan and
Kenny just for greater detail. I read, in this descriptive booklet, that
consumers in the participating provinces will benefit from the removal of
provincial retail sales tax from business inputs.
Would you very briefly describe how the federal sales tax deals with business
inputs and compare it with the way business inputs are treated by provincial
government sales tax? Let us use Nova Scotia or New Brunswick, whichever is
more convenient. I am referring to how the thing now stands, before
Mr. Drummond: Because the federal sales tax is a value-added tax, in the first
instance the business input will be taxed, but the business would receive a tax
credit back for that. There would be no net taxation on the business inputs.
The taxes will be in and out. The business would not incur any liability for
that tax. The tax burden falls at the point of consumption.
Depending on the province, between 35 and 50 per cent of provincial sales tax
revenue comes from the taxation of business inputs. There is no rebate
mechanism. There is no input tax credit mechanism. That tax stayed paid by that
Senator Stewart: You get a multiplier effect.
Mr. Drummond: Yes. There is a so-called cascading of taxation. The tax is
embedded in exports and raises the price.
Senator Stewart: Have calculations been made as to how much money the government
of the province of Nova Scotia now gets as a result of taxing these business
inputs which, under the harmonized sales tax, will not be taxed?
Mr. Drummond: In Nova Scotia, 35 per cent of their sales tax revenue comes from
Senator Stewart: So it would be 35 per cent of their revenue from that source?
Mr. Drummond: Thirty-five per cent is coming from business inputs. That will go
away on a net basis with the new taxes.
Senator Buchanan: What is the result then? Are you saying that consumers will
benefit by that through lower prices?
Mr. Drummond: Yes, definitely. The businesses will pass those savings on to the
Senator Buchanan: Did they do that with the GST?
Mr. Drummond: Yes, they did.
Senator Buchanan: Consumers in Nova Scotia will tell you that is not true.
Mr. Drummond: We estimated the price impacts of the GST and that was monitored
by the price monitoring agency. Our only error was that the savings got passed
on faster than we assumed.
Senator Buchanan: Very few people in the province will tell you that prices
dropped as a result of the GST. They may have for the first few months, but
that was the end of it.
Mr. Drummond: For example, car prices dropped over 4 per cent almost
Senator Stewart: My second question is more speculative. I have been wondering
why New Brunswick, Nova Scotia and Newfoundland went into this while Prince
Edward Island did not.
I suggest that there is something in the nature of the economies of those three
provinces that makes harmonization attractive to them, one aspect being the
points we just explored. Nova Scotia, for example, is, in a sense, a captive
market of Ontario for certain consumer goods, although not as captive as it was
before the free trade agreement. To an extent, the harmonized sales tax will put
some local businesses, although not all, such as the refrigerator business, on
a better and fairer footing relative to Ontario producers.
Have you looked into that at all?
Mr. Drummond: That issue was the focal point for the provincial governments.
Particularly in Nova Scotia and Newfoundland, they are building a manufacturing
base. It is still quite small, but they recognize that to establish a
manufacturing base that will supply their province and enable them to export to
the rest of Canada and United States they need a competitive tax regime, which
they did not have by taxing business inputs.
Since the North American Free Trade Agreement, an increasing number of
manufacturers in Nova Scotia, Newfoundland and New Brunswick are exporting to
the United States and other countries, which they were not doing five or six
years ago. They will see a large benefit from not having the tax imbedded in
You may recall that at the time of the GST we estimated that the federal sales
tax destroyed our competitive position vis-à-vis the United States by
more than one percentage point of the price. For a business which operates on a
3 to 5 per cent price margin, that is a pretty big difference. That is the kind
of benefit manufacturers and other industries in those provinces will receive.
Senator St. Germain: In good conscience, can you actually say you simplified the
Mr. Drummond: It would do better to ask that of some of the industries affected.
They will unambiguously say yes.
Senator St. Germain: I am asking about the average business person.
Mr. Drummond: It depends on your definition of "average". I picked out
12 sectors as examples. They are fairly large sectors, but not every sector is
addressed by that mechanism. As I have said, the GST has been operating quite
well for the most part since its introduction. There was no attempt to make
sweeping changes that will affect every small business. However, we dealt with
the difficulties in the sectors where they existed and observed the reaction
after the announcements were made in April. We have made further changes since
then. The business response has been positive. I have a biased view on that,
but you will be hearing from some of the people affected and I think they will
say that we have simplified it.
The Chairman: Thank you very much for your attendance here.
Senators, our next set of witnesses is from the Retail Council of Canada, to be
followed by the Canadian Restaurant and Food Services Association.
Mr. Peter Woolford, Retail Council of Canada: It is a pleasure to be here. With
me are Larry Durocher, vice-president of Woolworth Canada Limited, and Selma
Rotman, a vice-president with Winners Canada Limited. Woolworth has a wide
range of retail formats. They operate bargain stores which have a variety of
merchandise in the area of footwear and clothing. Winners is an off-price
fashion clothing store.
Thank you for the opportunity to be here. I would have brought more members with
me this morning, but it is year-end for many retailers and we did have rather
short notice. We regret that. You will be hearing from more retailers during
your hearings in Atlantic Canada.
I thank the chairman and the members of the committee for deciding to go to
Atlantic Canada. No matter what position one takes on this legislation, it is
important for Atlantic Canadians to have the opportunity to express their views
on the draft legislation.
The Retail Council of Canada supports the harmonization of the two tax systems.
We still believe it is the right thing to do. We say that even though, as was
pointed out in some of the discussion earlier this morning, there are retailers
who will be hard hit by this shift to a harmonized tax. The two members here
this morning will both see a hit on their sales because they sell clothing and
footwear. Nonetheless, the retail council has supported harmonization because
it is the right thing to do.
Our principal concern is with tax-included pricing and that is on what we would
like to focus this morning. Our main concern is what will happen in the
consumer marketplace as a result of the cost and impact on retail firms.
In the appendix at the back of our brief we have provided a summary of what the
costs to the retail trade will be. We have given you some samples from the
firms that helped us to prepare this material.
The numbers on the first page are from ten firms that volunteered to do some
detailed work to give us a sense of what the one-time cost of shifting to the
new system will be, what the ongoing costs will be and what the ongoing savings
from the input tax credit mechanism will be.
As you will see from the summary chart for those 10 firms, which account for
somewhat less than 30 per cent of the domestic Canadian retail market, we come
up with a net, one-time cost of around $28 million and gross total ongoing
costs of $33 to $34 million, offset by savings of around $6 million. So the
net, ongoing cost to those ten firms is in the neighbourhood of $27 million to
$28 million a year.
We then simply extrapolated to the full retail trade, recognizing that these
firms accounted for a little less than 30 per cent of the total. We came up
with a ballpark number of between $80 million and $100 million a year for the
retail trade in extra costs of incorporating tax-included pricing.
That should be put in some context, Mr. Chairman. The Atlantic Provinces
Economic Council recently released their report which showed a net economic
advantage to the region of around $43 million a year. Therefore, the cost to
the retail trade alone as a result of tax-in pricing is almost double the total
benefits to the region from harmonization.
On the other three pages of the appendix we show the different impacts of
tax-included pricing on firms of different sizes. I have used three firms as
examples. The first firm has sales of less than half a billion dollars a year,
the second firm has sales of between $50 million and $75 million a year, and the
third firm has sales of multi billions of dollars a year.
You can see that by the type of firm and the format in which they operate the
costs of tax-included pricing vary quite widely. This simply increases as you
sell more and get bigger and stronger and make more money, so a relatively
small firm can incur a great deal of cost simply by the niche of the market
they are in. On the other hand, a somewhat larger firm might have negligible
costs in another area, again simply because of their format.
That explains why there is a difference between the grocery trade and the
general merchandise trade. The grocery trade does not normally put prices on
their products. Sixty to 80 per cent of their merchandise is zero-rated and the
prices of many of their items fluctuate almost on a daily basis, so they have
adapted to a different market than the hardware or clothing or furniture
businesses, and that is just a difference in the trade.
I should like to make a couple of points on small business. Many of our
independent retail members in Atlantic Canada are concerned that price points,
which are very important to them as a way of communicating what their store is
and the type of offerings they have to make, will be destroyed by this process.
An independent shoe retailer who appeared before the House of Commons Finance
Committee said that if he were forced to sell boots at over the $99.99 price
point, his sales would disappear, that women will not buy a boot that costs
$109.99. He said he would have to try to find a boot at around $86 so that he
could still price it, tax-in, at $99.99.
As a corollary to that, no manufacturer in Canada today is offering boots at
that price point. In a relatively small portion of the market, pricing
practices will not be the same as in the great majority of Canada. That will
cause some disruption in the supply of product, particularly to independent
merchants, and will take some time to sort out and will cause some losses.
On the issue of advertising, which was mentioned by the finance officials, we
are still not sure exactly what the regulations will be. For national
companies, an exemption which would allow them to show a tax-out price with
some kind of disclaimer would be attractive. I have heard from some independent
firms that they are worried about that. Independent retailers who do not
advertise but rely on prices in their stores are concerned that their prices
will appear to be higher than the advertised prices customers see from their
I do not know how real that concern is in the marketplace. I simply suggest that
the committee probe that when you are in Atlantic Canada.
Finally, I should like to say a couple of words on confusion. The government
said the purpose of tax-included pricing was to provide clarity and certainty.
I think this policy will make the retail market more complex, less certain, and
somewhat more difficult to decode for the consumer. Governments have put in
place no less than four different ways that the price can be displayed. They
are talking about allowing advertising to be done in a different way again. The
customers will have to decode prices. They may not know today with any great
precision what the tax-included price of the product is, but they know for a
certainty what the base price is. That will not be as clear to them under
tax-included pricing. We can we train them to be more careful in shopping for
prices, but I do not think that they should be forced to go through that more
complex decoding process.
Mr. Larry Durocher, Woolworth, Retail Council of Canada: Woolworth operates 10
different divisions in the maritimes, with 10 different store names. There are
about 125 stores. We do in excess of $100 million in volume. We employ about
1,200 people. We are relatively strong supporters of HST, but on a national
basis with a common base and common collector. We have a real problem with
tax-in pricing. We are typical of what are referred to as general merchandise
retailers or department store merchandise retailers.
Tax-in pricing results in tremendous excess costs to us, and our concern is that
those costs will have to be borne by someone. Mr. Drummond made the comment
that costs and savings quite often do not get eaten by the business; they get
passed on to the consumer. That is certainly a possibility. The consumer must
realize that there is a possibility of increased prices as a result of the costs
the retailer will be forced to incur under this legislation. However, if the
business chooses to absorb that, that will raise all their operating costs,
decrease their profit and have an impact on the profitability of stores in the
The government has given us four different options to accommodate the issue of
tax-in pricing. Their position, as Mr. Drummond mentioned today, is that that
gives us enough choice to accommodate all situations and makes it easy for both
the consumer and the retailer to fit within the legislation.
In fact, it does the opposite. We have examined all four options. They involve
millions of dollars of cost to us as a corporation alone. More important is the
confusion that will result at the point of sale. Because of the options
available, a customer shopping for an item can find it priced in four different
ways at four different stores. Rather than clearing up the confusion about the
exact cost of the item, this creates confusion. We see this as a major
In summary, we do not see the link between tax-in pricing and the HST. We do not
feel that they are wedded to each other. We support HST. Tax-in pricing,
however, causes us great difficulty. We think the government is taking too
simplistic a position on the issue.
Senator Angus: Do you consider the provision under Part II of Bill C-70 to be a
harmonized sales tax?
Mr. Woolford: It is the beginning of a harmonized system. From the beginning we
have stressed the need for this to spread throughout Canada as quickly as
possible -- single base, single rate, single administration. We are concerned
that it is being started in three relatively small provinces. At this time,
there does not appear to be much momentum for it to move further, so that
remains a substantial concern for us.
Harmonization in Atlantic Canada would be beneficial to that region, and we
would still support it even though it may cause some problems for the retail
trade. The tax-included pricing portion of it makes it very difficult, but we
do support even such partial harmonization as we have here.
Senator Angus: If I understand you, you are saying that there are elements of a
harmonized sales tax in Bill C-70 but that it is really an apples and oranges
situation in a sense, because this tax-in pricing does not form part of a
harmonized sales tax as you would understand it.
Mr. Woolford: Not at all. You could completely harmonize with those three
provinces and do nothing on the inclusion of tax-in prices.
We already have or will have, as Senator Meighen pointed out, three different
tax systems in Canada; the harmonized sales tax in Atlantic Canada, the PST in
Quebec and the GST for the rest of Canada. There are three different taxes now.
We will not make much progress toward harmonization until a lot of provinces
coalesce around one model.
Mr. Durocher: I agree with Mr. Woolford on those points entirely.
Senator Angus: That leads me to the business of Quebec. After the GST was
legislated, Quebec did introduce legislation which harmonized its PST with the
What is the difference between what the three maritime provinces are trying to
do and the Quebec situation?
Mr. Woolford: The first and most important difference is that Quebec administers
the tax on behalf of itself and the federal government. The harmonized sales
tax will be administered initially by Revenue Canada and then, I think everyone
hopes, by the National Revenue Commission.
Second, when Quebec joined, initially they did not provide full input tax
credits for their portion of the harmonized tax. Firms did not get back 100 per
cent of the taxes they paid. That has been more or less eliminated at this
point. There are still some smaller areas where firms do not get back full input
Third, there are some items in Quebec which are not within the federal GST base
yet, so it is not a full and complete harmonization. Over time, Quebec has
gradually moved toward that.
Finally, there are some rules regarding the location that a transaction takes
place; that is, the so-called place of supply rules. Quebec has made a generous
interpretation; namely, if any portion whatsoever of the transaction takes
place in Quebec, the Quebec portion of the tax must be paid.
You cannot continue with that kind of generous interpretation once another
province is operating a value-added tax, otherwise firms will be paying three
and four times on the same transaction. My understanding is that the federal
government, the Atlantic provinces and Quebec are moving to sort that out. I do
not know if that has yet been resolved.
Those are the principal issues.
Senator Lynch-Staunton: What about tax-in pricing?
Mr. Woolford: They do not do tax-in pricing. Quebec considered tax-in pricing in
1992 and again in 1994 and backed away from it because they felt it would be
too difficult to implement in one province.
Mr. Durocher: I am not as well informed on the Quebec situation as Mr. Woolford,
but certainly the issue comes back to tax-in pricing. For us, the Quebec
situation is seamless. It becomes an information technology issue. The issue in
the maritimes involves labour and supplies, as well as issues of information,
technology and equipment. It is an entirely different situation and is all
related to tax-in pricing.
Senator Angus: Can I conclude from what you have both said that the Retail
Council of Canada and its members, such as Woolworths, do not have the same
problems with the Quebec harmonized GST as they have with the one proposed in
Mr. Durocher: Absolutely.
Senator Angus: Mr. Durocher, you said that the excess operating costs which will
result from the implementation of this tax-in pricing will be significant for
you. As a result of this, are you contemplating closing any of your 125 stores
in the maritimes?
Mr. Durocher: We constantly review that issue. Traditionally, retail properties
are leased, normally with a five-year term. As a property comes up for renewal,
you always consider whether you will go forward. Obviously, a big deciding
factor is whether the store is making money. A rational person would not
continue to operate a business that is constantly losing money.
If our estimates of these costs and our understanding of the legislation is
correct and if we, as a business, are forced to bear those costs as opposed to
passing them on to the consumer, it could make profitable stores unprofitable.
When their leases came up for renewal, we would have to decide whether to
Senator Angus: Is it not a fact that at the present time you are considering
Mr. Durocher: We did some initial analysis and tried to estimate the impact of
this. The initial analysis indicated that several stores would be candidates
for closure, but no decisions have been made at this time because this bill is
not yet law.
Senator Angus: Mr. Woolford, you were present when the previous witnesses were
testifying. I understood from them that on the face of it there appears to be a
reduction in the tax that would be paid under this legislation but that this is
rather illusory because the base is broadened.
Do you have any numbers which would show that there would be no tax saving and
possibly a tax increase as a result of this?
Mr. Woolford: The governments have argued that this is essentially revenue
neutral for the provinces; that the dollars they will collect in consumption
taxes will remain about the same. There is an old axiom that firms do not pay
taxes; people pay taxes. That means that the consumer will probably not be
better off, but will not be worse off either. They will pay less tax on some
items but will pay tax on other items on which they previously have not paid
Generally, the HST and the GST are fairer taxes than most provincial taxes. The
HST is levied on a fairly broad base of goods, which means that the rate is not
as high as the old manufacturers' sales tax. The choice between goods and
services is not distorted in that way. In our view, it is better to levy the
tax on a broader base. Although that means that in the short term consumers may
pay more on day-to-day consumables, they will benefit when they make a fairly
Senator Angus: The position of your association and its members is that
harmonization is a good thing if it is done right but that this act is sort of
a wolf in sheep's clothing and is not harmonization. It contains overlap,
administrative problems, issues which affect national advertisers and so much
red tape that, rather than harmonization, it is a great cacophony, which you do
Mr. Woolford: That is a little unfair. We would strongly support the HST without
tax-included pricing. Even though the tax applies to transactions which were
not previously covered and includes fairly complex place of supply rules, we
would still support it. Even though it covers only about 8 per cent of the
Canadian people, we still support it as a starting point.
Obviously, along with the federal government, we hope that it expands very
quickly. Our concern is that it will not.
Senator Meighen: When, if ever, would you support tax-in pricing? Would that be
when every province buys in or when a majority buy in?
Mr. Woolford: That is a difficult question to answer because tax-in pricing
fragments the market so badly.
To be quite honest, I get different answers from our members at different times.
The hope of retailers is that if a large majority of the country were in
agreement, the pressure on the rest of the provinces to come into that system
would be so great that it would happen very quickly. Being practical people,
they would say, "We could support tax-in pricing if 60 to 70 per cent of
Canadians were included because we are fairly confident that the remaining
provinces would see enormous benefits and feel enormous pressure to come in."
As long as there is a province or territory which is not harmonized, the costs
about which Larry spoke and to which Selma will refer, will still be there.
Ironically, the smaller the problem, the bigger the costs attached to what is a
relatively small piece of business.
Senator Angus: You indicate that tax-in pricing fragments the market. I take it
this is a bad thing which has substantial negative effects. Could you give some
examples of that, please?
Mr. Woolford: This goes to a point made by Senator Hervieux-Payette earlier when
she talked about the tax regimes in Europe. She said that in Europe the tax is
buried in a price and you do not even see it on the receipt. She pointed out
that the rate even varies within the country, depending upon the item bought.
That is fine. What we are creating in Canada is a system where the tax status of
the individual item varies according to where it is bought. If I buy a pencil,
for example, in Ontario, it will cost $1.07; if I buy it in Quebec, it will
cost $1.13; if I buy it in Atlantic Canada, it will cost $1.15. When the tax
status of the product changes depending upon where it is bought, you start to
create a lot of problems for the retail trade.
Senator Angus: That is what you mean by fragmentation; in other words, the
differing in prices.
Mr. Woolford: Yes. That is so because retailers, increasingly in the general
merchandise trade, are trying to price that product as close to the
manufacturing level as they can because that is where the costs are lowest.
When this pencil is put in a box of 10, quite often a price is put on the
product by the manufacturer. In fact, you will see it printed right on the
product, which means that the cost of pricing the product goes to zero.
However, if you have to break the market into two or three segments, you can no
longer do that.
We are all familiar with the prices which are printed on the backs of
paperbacks. On the backs of English paperback books, you will see a price for
Australia, Britain, U.S.A. and Canada. You cannot then add in Atlantic Canada,
Quebec, Ontario, Alberta and the rest of Canada. It just will not happen. This
means that the retailer has to reprice those products, either at the
distribution centre or in the store, which is where the extra cost burden comes
Senator Angus: I would like to understand why that is so bad. I want to
understand why you say these new rules will impose such a burden. Your evidence
is that because you cannot, at the distribution points, put a price on a
product that is destined to go to all the provinces of Canada, there will be an
extra burden. Why can they not put different prices on those products?
Mr. Woolford: First, it is a very labour intensive business to put on different
prices. Second, you have to pre-guess how many of each item you will sell in a
particular province. That is particularly problematic for clothing and
footwear, for example, where a sweater or a particular running shoe may be more
popular in one part of the country than in another, in which case retailers move
their merchandise around.
Retailers have tried to put in place the same kind of just-in-time inventory
system about which you have all read with respect to the auto industry. That
relies on a single, seamless flow of product moving through their
manufacturing, distribution, delivery and retail chains. That works because it
assumes that the country is a single national market through which that product
is moved. When you start to break the country apart at the retail level, you
have to diversify that stream and know that one box of product is going to
Atlantic Canada and another box is going elsewhere.
Governments have also tried to resolve that by allowing a variety of different
pricing formats in stores. They have said that we can continue to show that
tax-out price on the product, as long as we have the tax-in price on the bin or
on the shelf. We are concerned that that will get a little complex for the
The front of a shelf is a fairly narrow piece of real estate. The pricing tags
there are quite small. The pricing tag that goes on the product may be quite a
bit larger and more prominent. The customer will not always remember to check
the fine print on the shelf or on the bin to determine the tax-in price. Our
members are concerned that, with this variety of options, when a customer buys a
basket of different goods he or she will not remember what the tax status of
each of those goods is.
Therefore, merchants end up in a difficult situation. They can either go to a
tax-in price, carry the cost of doing that and at least be clear to their
customer; or they can take advantage of the rules, save themselves some costs,
but annoy and confuse the customer. It is a terrible situation for a retailer.
Senator Buchanan: Mr. Woolford, when you were in Halifax in another forum, I
believe you indicated that the one-time transitional cost to the stores which
belong to the Retail Council of Canada, the national chains and others, would
be in the range of $100 million. You indicated that the annual charges could be
between $80 million and $100 million. Is that right?
Mr. Woolford: That would be right, yes. Those data are in our appendix.
Senator Buchanan: You also indicated that as a result of that, if this bill
becomes law, the retailers in your organization would either have to absorb the
costs themselves or increase the cost of goods to consumers. Shoppers in
Halifax have told me that they cannot absorb their share of those costs and
that the Retail Council is correct in saying that it could result in the loss of
thousands of jobs in our three provinces. Is that still correct?
Mr. Woolford: Yes. We have checked with both our independents and our national
chains. They are very concerned about the extra cost. As everyone knows, this
has not been a good decade for retailing. These are not rich firms.
Senator Buchanan: I heard that about 6,000 jobs could be lost in Nova Scotia.
Mr. Woolford: We have not ascertained a number. I do not know where your figure
comes from. It is very hard to know.
Senator St. Germain: My question relates to what Senators Buchanan and Angus
have been asking you about. You say you support harmonization in principle, but
that is all.
Mr. Woolford: We support it in fact as well. We support harmonization.
Senator St. Germain: You say you support Bill C-70 even though you will have job
losses, horrific cost increases to your people and tax-in pricing. Are you
trying to be nice to someone or what?
The Chairman: Senator St. Germain, in fairness, let him answer the question. He
did not say what you are suggesting he said.
Mr. Woolford, would you clarify Senator St. Germain's misunderstanding?
Mr. Woolford: We support harmonization. We support the amalgamation of the two
taxes into a single system with the single base, the single rate and the single
administration that is provided for in Bill C-70. The only element that we are
opposed to is the requirement that retailers include the tax in their prices.
For us, that is where the cost and the burden comes. Otherwise, it is a benefit
to the retail trade of somewhere around $20 million per year.
Senator Oliver: Are you asking for an amendment to this bill?
Mr. Durocher: We do not see the necessity of connecting the HST and tax-in
pricing. We would like the tax-in pricing issue removed from the bill.
Senator Kenny: I have a couple of procedural or methodology questions and then a
couple about consumers. When you appeared before the House committee, Mr.
Woolford, you indicated that you had formulated your views on the basis of a
telephone survey of 10 corporations. Is that correct?
Mr. Woolford: No. In fact, we asked our membership to do a fairly thorough audit
of their operations, which would entail the expenditure of quite a bit of time.
Ten firms volunteered to do that and spent several weeks going back into their
operations. They generated the data that are in the appendix.
Senator Kenny: I was referring to when you appeared before the House of Commons
Mr. Woolford: Those are the same items to which we refer there.
Senator Kenny: You are extrapolating from 10 firms for the 6,500 firms in your
Mr. Woolford: We have made it clear from the beginning that we are extrapolating
for the whole industry. These 10 firms represent a little less than 30 per cent
of all the retail sales in Canada. They are large national companies.
Senator Kenny: This is not a representative group of your firms.
Mr. Woolford: No, and we have never pretended that they were.
Senator Kenny: These are the big guys.
Mr. Woolford: As you can see from the detailed chart on the second page of our
appendix, we do include several fairly small firms with sales of under $100
million a year.
Senator Kenny: Do these large firms, such as Shoppers Drug Mart and Canada Tire,
have separate forms of promotion in different parts of Canada?
Mr. Woolford: Some do; so do not. They try to tailor those promotions to fit
within a larger national package. They vary a portion of it, but not all.
Senator Kenny: Do the advertising or flyers vary, for example, at Woolworths,
according to different markets in the country?
Mr. Durocher: Yes. We have one division which puts out about 48 flyers a year.
There are differently zoned flyers for different areas of the country.
Interestingly, there is not a single zone for those three maritime provinces.
Senator Kenny: How many zones are there?
Mr. Durocher: There are six.
Senator Kenny: Six for the three provinces?
Mr. Durocher: No, there are six nationally. One of the zones is both the
maritimes and, coincidentally, the far northwest. Under this proposed
legislation we would have to put out a separate issue of every one of those 48
flyers for those three maritime provinces, each of which would incur extra
production costs. We would have to pass that cost on.
Senator Kenny: Mr. Woolford, is it correct that you have been invited, on
several occasions, to participate in developing these guidelines and that you
and your association have turned down these requests?
Mr. Woolford: No, that is not true. We have worked closely with the Department
of Finance on this and have talked with them actively over the months. I found
them and the provincial governments to be pretty good to work with on this. We
obviously have differences of view, but we have worked with them as best we
The problem has been that governments have been looking for a compromise and,
unfortunately, our message back to them has been that it is very difficult for
a trade association to accept a compromise which benefits some of its members
and hurts others. We have tried very hard to explain, especially to the federal
government, that the compromises they came out with, for example, on January 17,
help some firms quite a bit but disadvantage others.
As an example, Ms Rotman from Winners is not helped much by the pricing
alternatives provided on January 17. However, some of Mr. Durocher's stores
could well be helped in terms of getting their costs down, although it creates
confusion for the customer. As a result, two firms which are competing against
each other in ladies' clothing will be treated differently by the government's
A trade association of which both those companies are members cannot support
that. I cannot say that the interests of Woolworths are more important than
those of Winners.
Senator Kenny: I should like to return to the consumer. What are your comments
on the survey tabled in the Senate prepared by Ekos Research Associates? The
survey was taken of maritime consumers, and 80 per cent of the respondents said
they wanted tax-inclusive pricing. The survey goes on to say that 67 per cent
of consumers try to figure out the price they will pay before they get to the
cash register and they are frustrated when they are unable to calculate the
Why are you opposed to this when your consumers say they want to know the price
they will pay at the cash register and that they feel confused when they cannot
tell exactly how much they must take out of their wallet?
Mr. Woolford: We have never debated whether consumers would like to know the
final price. We accept that. We acknowledge that the preference of the
consumer, as they voice it in surveys and in other research instruments, is to
know the final price, including the tax. That is not at all surprising and is
in line with research that companies have done as well.
Our first concern is that it is awkward and complex to do it in a part of the
country which accounts for only 8 per cent of the domestic market. In effect,
it blows apart everything retailers have done for the last 15 years to get
costs to consumers down.
Our second concern is that the policy that has come out is not clear, direct,
and easily understandable by the consumer. You may hear that from the
consumers' association this afternoon. You might want to probe them on whether
they support the policy that the government announced on January 17. My
understanding is they have said that consumers want a consistent, clear way of
understanding what the final price is. This is not consistent within a store,
between stores, or between provinces, and it certainly will not be clear.
Senator Kenny: Do you accept the fact that prices to the consumer will go down
by 4 to 5 per cent?
Mr. Woolford: Yes.
Senator Kenny: Have you included in your study the impact on your member stores
of a reduction in price? Presumably if prices go down, volumes will go up, and
your people will do better. Is that included in the study? This is the first
time I have seen it, since it was just distributed to us this morning.
Mr. Woolford: We did not look at that since that is the benefit consumers and
businesses get from harmonization. We focussed on the impacts of tax-included
pricing. As I said, at the end of the day harmonization is more or less revenue
neutral for those provinces. The consumer is paying roughly the same amount of
tax as he or she would have under the two old systems, but is now paying it on a
different basis and a different set of products.
Senator Kenny: Do you not think you would see a different result if you had
included that in your study?
Mr. Woolford: No, because we studied only the effect of tax-in pricing.
Senator Kenny: Would it be unfair to ask your association to redo your study
taking that into account?
Mr. Woolford: We have never debated whether harmonization was good. We accept
that it is. The benefits to which you refer, the reduction in the rate of the
tax, come as a result of the harmonization of the two taxes.
Mr. Durocher: We have tried to stay focussed on the issue of tax-in pricing. To
answer your question specifically, the majority of the products Woolworths
sells is clothing and footwear. In New Brunswick and Nova Scotia, any clothing
and footwear purchased under $100 is currently exempt from provincial sales
tax. Our average transaction is less than $50. Currently, the customer pays no
sales taxes on our average transaction. With the new legislation, she will pay
sales tax. That will hurt our sales, but that is not the issue. The issue is
not whether we should be excluded for clothing under $100. We can live with
that for the good of harmonizing the sales taxes. The issue is tax-in pricing.
Senator Kenny: I understand that, but you are being presented with a package,
and you are giving us figures which relate to one part of the package and none
which relate to the other part of the package. You have explained clearly why
that is. You like one part of the package and you do not like the other part.
However, at the end of the day consumers will still pay out the same amount of
dollars. I do not think it is unreasonable to ask you to look at it from your
customers' point of view and show them what the overall picture would look
The figures here tend to be kind of scary because they present only half the
picture. If you presented the whole picture, they would not be so scary.
Mr. Durocher: The Department of Finance has said that the taxation will be
revenue neutral so, at the end of the day, the customer will still be paying
the same total amount of tax. It is just that she will be paying tax on
products on which she did not pay tax before and paying less tax on other
products. The net effect is neutral. The net effect on sales should also be
Senator Kenny: So the difference would be that the customer would go to the
register knowing exactly what she was about to pay instead of trying to figure
it out with a calculator on her way there?
Ms Selma Rotman, Vice President, Marketing, Winners: I do not believe that
customers try to figure out the price on their way to the register. People
think in price tickets. Whether they are in the United States, Ontario or
British Columbia, they think in price tickets. They do not think that a
particular item will cost "X" dollars extra because they are in a
particular province. When they see their receipt, they realize it.
Consumers are not stupid. They understand that there is tax on certain items. In
our store, 97 per cent of the merchandise will become taxable. The prices will
look a little ridiculous. Even though the consumer may say she would like to
see tax-in prices, she will be looking at a price of $8.04, instead of $6.99.
She will try to work backwards to the price of this item to compare it to what
she may have seen in catalogues or American magazines. I think she will be more
confused by this.
Senator Kenny: Am I correct in saying that you are giving me anecdotal
information based on your store versus information in this study which,
statistically, will be correct 19 times out of 20 with a plus or minus 4 per
Ms Rotman: Are you talking about the consumers' poll?
Senator Kenny: This is a survey of consumers right across the maritimes.
Assuming the poll has been conducted fairly and reasonably, it gives us fairly
accurate information. You are giving us anecdotal information which I am sure
is accurate in terms of your perspective in your store, but surely it is not
representative of the entire region, unless you have done a survey.
Ms Rotman: If you asked the whole nation, not just the maritime provinces, if
they would like to see the final price on the ticket, they would all say yes.
It is very simplistic. It will be very expensive for us to implement, unlike in
Europe where they work backwards.
I am in marketing and have been a merchant all my life. You price things with a
99-cent ending to make it exciting, to make it interesting, to deceive the
consumer, or whatever. She likes the sound of the price.
In England, they work backwards. They come up with these interesting prices and
then they come back to their actual retail prices, so it does not result in
prices ending in 24 cents or 1 cent. The only other way to do it is to have a
separate price structure for the maritime provinces.
Winners is a one-price store, whether in British Columbia or Newfoundland, where
we plan to open in the fall. We absorb the costs of the transportation. We do
not currently do different advertising in different locations but we will have
to resort to zone advertising if this comes into effect, because there is no
way you can have a ticket price of $4.01.
Senator Kenny: Given that the final price will be known to the consumer and that
the amount of tax will be shown to the consumer on the receipt, would you
concede that this legislation is not designed to deceive the consumer?
Ms Rotman: I never said it was designed to deceive the consumer. I believe it
will confuse the consumer. People who go to Ontario or the United States will
think that prices are much lower there.
I have here a child's toy which has imprinted on it by Lego, "$11.95,
$14.95 in Canada". We will have to add to that, "$17.19 in Nova
Senator Kenny: I was referring to your comment that you price things with a
99-cent ending in order to deceive the consumer.
Ms Rotman: I did use those words. It is a marketing tool.
Senator Kenny: I suggest that the purpose of this legislation is to make things
clear to the consumer so that these marketing tools or tricks or whatever you
want to call them are transparent. The consumer will see, from start to finish,
how much the tax is and what the total price is.
Ms Rotman: Why could we not use conversion charts? I think every company would
be happy to put up conversion charts. It would make it very simple. We do not
want to confuse the consumer. We will be perfectly happy to accommodate any
kind of price structure except the expense of changing tickets. In our firm we
have a central distribution centre. Everything is priced before it is
distributed because our distribution changes on a daily basis. We replenish
every one of our stores with 10,000 units every single week.
That means that everything that goes to the maritimes must have the ticket cut
off and another applied before it can be shipped. This is very expensive, in
addition to the systems that must be put in place at a cost of a few hundred
thousand dollars. This is very time consuming and expensive.
When the merchandise is shipped to another store for whatever reason, the ticket
must once again be removed and another one applied. That allows for a lot of
error and confusion.
Mr. Woolford: It is fortuitous that I have two members here. Let us assume that
these two stores are selling a sweater. In Ms Rotman's store, that sweater is
often displayed on a hanger on a rack. That rack runs for 30 feet or so with a
wide range of different types of sweaters at different price points. Every one
of those sweaters must be priced tax in. Ms Rotman will be offering a sweater at
$32.47, as an example.
In Mr. Durocher's stores, the sweaters are typically displayed folded on
shelves. He can put a tag on that sweater which is tax out as long as he puts a
tax-in bin price or shelf sticker on the shelf. The edge of a shelf is not very
large. The customer goes in and takes a sweater off the shelf and sees a tag for
$29.99. They go down the street to a Winners store where a similar sweater is
hanging on a hanger. It will have a tax-in price of $32 and change. This is not
easily decoded by the consumer. It will require more work than they have to do
today. They will not always be comparing apples with apples. We are concerned
about that; there is no question.
Senator Buchanan: People are the best poll.I spoke to a lady last night who told
me that last Christmas she bought most of her clothing gifts from Foot Locker,
Winners and The Gap. On most of the items, she paid GST. She asked me whether
she will pay more for the same items in the same store with the HST for
Christmas 1997. Is it correct that she will?
Mr. Woolford: Yes.
Senator Buchanan: In 1996, she bought a coat at Winners for $80 plus $5.60 tax;
a total of $85.60. In 1997, if the coat is at the same price, she would pay $92
with the HST. Is that right?
Ms Rotman: That is correct.
Senator Buchanan: With regard to signs, what happens if someone inadvertently
knocks a sign off a bin? What if a federal inspector walks in and sees that
there is no sign on that bin? The store could be charged because they did not
put up a sign. The manager will say, "I did put the sign up; someone must
have knocked it on the floor."
Mr. Woolford: Housekeeping is always a problem in the retail environment.
Consumers insist on coming into the stores; it is the strangest thing. It is a
concern in terms of keeping the store properly merchandised and looked after
with the prices and so on. It is an ongoing problem in any store format that
you make sure the customer knows to what the prices apply.
The bin signs are one example and another is shelf stickers which can be moved
along the shelf. Little kids love playing train with the stickers. It is a
reality retailers have to live with. It is an ongoing problem we face.
Senator Hervieux-Payette: I am wondering if you also represent grocery retailers
or just those on the dry goods side.
Mr. Woolford: Our membership includes food and general merchandise retailers.
This morning, we are expressing the views of general merchandise retailers. As
you are aware, Mr. Michel Nadeau, from the Canadian Council of Grocery
Distributors, will be here this afternoon. He will be able to discuss with you
the interests of grocery distributors.
Senator Hervieux-Payette: I was wondering if you all came under the same
Mr. Woolford: No.
Senator Hervieux-Payette: There should be more women senators here. We often do
more shopping than all of you put together. Whether a magazine is imported or
not, the price is already printed on the cover. I am most familiar with the
situation in Quebec. I must tell you that between the price suggested by the
big chain and the price you pay with the tax, there is a difference.
The price on the magazine is not often the one that you pay, even tax-out. When
you talk about having a price on the product that leaves your warehouse and of
not, obviously, using a tax-in price, I would like to say that my impression is
that if I buy the same item at the Price Club and at The Bay I am not paying
the same price.
Some stores have a policy of charging less than some other retailers. I was
wondering if the prices charged by the Price Club were ticketed. It is not a
very sophisticated system, with the shelving et cetera, and in Quebec this type
of store is growing ever popular.
I am trying to see a difference between those who buy from various suppliers
versus your chains, such as Woolworth, that might have their own labels, and
that also buy from other sources, other manufacturers.
Do all of your members have the same opinion on this? I look at the Price Club
and I do not see how it could sell a product that has already been ticketed by
the manufacturer. How does it really work?
Mr. Woolford: What you are seeing here, is competition. There are different
types of stores. Various companies present their merchandise in different ways,
in a different environment, in accordance with their interests and needs.
Very often, you see companies that are competing against each other. One offers
all sorts of services with individually ticketed items and the other offers its
merchandise differently, with price signs on the walls or perhaps even on the
It is up to the company to choose. In this way, the customer has the best
possible choice in terms of service, price, presentation and selection. It is a
little more difficult to regulate this type of competition. Obviously, you also
see that prices vary from one store to another, according to the retailer's
opinion of the market and his or her position in terms of efficiency and
There is also a choice as far as the market niche is concerned. In any store,
you'll find various items for sale. You take a certain margin on different
types of merchandise. If I am really interested in a specific type of
merchandise, I might offer it at a reduced price, whereas my competitor will
not. It is my choice and it is his or her choice to identify the lines that
will be more important and will bring more money in. In reality, it is the
market that regulates that to a certain extent.
What worries us is that it is an aspect of competition; pricing will be
regulated. We will have a little less choice as far as pricing is concerned.
There will also be more uncertainty in that area because there will be rules to
follow in order to reduce the cost of the various pricing options.
Senator Hervieux-Payette: What percentage of your members use numerical codes
when ringing in sales? Would it be 90 per cent of them or else a minority?
Mr. Woolford: Frankly, I do not know. My impression is that most companies use
product codes. Some of them use the "price look-up" system where the
digits of the code are entered manually at the point of sale. Others use the
scanning system with the hand-held gun and the light. It varies. My impression
as far as small merchants and national chains are concerned is that the majority
of retailers use product codes today. But not necessarily the code supplied by
the Uniform Code Council of Canada, a group of associations and companies that
regulates product codes for all of Canada.
Some companies also have in-house systems. Very often, small merchants use the
numerical codes of the company.
Senator Hervieux-Payette: While I was listening to your brief and to your
explanation of the views of your members, I asked myself the following
question: what percentage of your members were consulted and how many suggested
alternatives? Following consultation, did you publish a report, meet the people
at Finance and say: we, the retailers, support the harmonized tax and here are
the mechanisms -- if the tax is to be included in the price -- that would be
the most appropriate to achieve tax-in pricing?
Mr. Woolford: Yes, we launched three major communication initiatives with our
members. We sent out information in July and once again in November. The last
time was last week. Other faxes and letters were sent to all of our members who
do business with the Atlantic provinces. Less than a dozen companies wrote to
us to tell us they were not in agreement with us.
We have some 500 members in the Atlantic provinces.
I personally received seven phone calls, faxes or letters from members telling
me that they were not in agreement with us on tax-in pricing. A few are also
against harmonization in general.
Most often, those who voiced their opposition were clothing or shoe retailers,
because they are fearful of a price increase. I received six or seven letters
to that effect. Overall, our association received approximately a dozen
responses from members saying that they did not agree with our position
regarding tax-in pricing.
Senator Lynch-Staunton: I am still at a loss to understand why we have to spend
so much time discussing whether the tax is included in pricing. It seems to me
that is not a role for the Parliament of Canada to be engaged in. Rather, it is
up to the retailers themselves to proceed in a way to which they feel consumers
best respond. Whatever the polls say, I think it is up to the retailers to take
those polls and do with them as they wish. I would support any move to remove
this aspect from the bill.
If we were discussing a national HST, one that were applicable to every province
and territory at the same rate, would your objections to tax-in pricing be the
same as they are today?
Mr. Woolford: No. If there were a national sales tax, with the same base and the
same rate, we could live with tax-in pricing. Some of our members are still
nervous about Canadians making Canada-U.S. comparisons, but we would support
tax-in pricing if it were national and had a single base and single rate.
Tax-in pricing at different rates in different provinces will compound the
problem that concerns us in Atlantic Canada.
Senator Lynch-Staunton: I appreciate that. That is the problem with the
so-called harmonization that we are discussing. It applies only to a small
market and will cause major disruptions to national retailers, and even local
Mr. Woolford: To be very clear, if all the other provinces were to harmonize,
but at different rates, that would be even worse than the system we will have
after April 1 if this legislation is passed. We would not have three different
systems in Canada, bit four or five or six. That would compound the problem for
Senator Lynch-Staunton: My question was based on the ideal situation of one
uniform sales tax across the country.
Ms Rotman: The only problem we would have with that is if the government
suddenly changed the rate, for whatever reason. After putting all our tickets
on, which will probably take three or four weeks, we would have to cut them all
off and reticket the entire store.
Senator Lynch-Staunton: Which is why we have no business discussing this policy.
It is up to the retailers to decide what is most profitable and advantageous to
them and their customers.
The government claims, in its publication of October on sales tax harmonization,
that past studies done in Canada and other countries show that when sales taxes
have been replaced with value-added taxes, tax savings were passed on to
consumers. Do you have any studies that support that statement, which seems to
be quite categorical?
Mr. Woolford: We do not have any studies. I know the federal government, at the
time the GST was introduced, set up a consumer price monitoring organization
which did that research. It also set up toll-free phone lines across Canada for
complaints from consumers. In the final analysis, that body, which included
government, consumer and business representatives, concluded that the reductions
in price were passed through faster and more completely than had been forecast
by economic theory. It helped that Canada was in a recession at that time,
obviously, but my recollection of their research was that businesses passed
those savings on faster and in fact passed on slightly more than they would
have normally been expected to pass on. We did not do any research at that time.
A couple of our members sat on the board of that organization so we cooperated
with that work.
Senator Lynch-Staunton: Will the savings from the removal of the embedded
provincial retail sales tax be passed on to the consumers?
Mr. Woolford: Yes, I am sure they will be. As Larry and Selma can tell you, the
price competition in the market is fierce. If the cost of their merchandise
goes down, that will roll through to the customer very quickly. We are
concerned that the additional costs will more than eliminate those savings.
Senator Lynch-Staunton:I would like to see that information. There are savings,
I have to admit, but then there are costs. Does one offset the other?
Ms Rotman: Not in our company, because most of the merchandise in our stores is
tax exempt. I would say that 97 per cent of the merchandise, except for the
coat to which you alluded, is tax exempt. No, it will not offset our costs.
Mr. Durocher: In fact, almost exclusively in apparel and footwear, in two of the
three provinces net final prices will rise.
Senator Buchanan: The coat will cost $92 rather than $85.
Senator Lynch-Staunton: I accept the fact that the tax will go up, but will the
savings generated by the removal of the embedded tax offset the increase in the
Mr. Durocher: Are you referring to the input tax credit?
Senator Lynch-Staunton: Yes.
Mr. Durocher: That is an interesting point. The government has taken a fairly
strong stand on the benefits of the input tax credit. The analysis we did
showed that for the 10 larger firms that were surveyed, representing 30 per
cent of the retail base, the initial costs or the incremental costs were in the
of $34 million. The input tax credits were in the range of $6 million, leaving a
net deficit of $28 million. So the input tax credits were relatively minor in
comparison to the incremental costs that we will all incur.
Senator St. Germain: Is this $20 million that you said would be saved based on
the status quo? Where is this $20 million? You said that if this goes through,
with tax-excluded pricing, the HST as presented would save $20 million.
Mr. Woolford: To retailers alone.
Senator St. Germain: Even with the broadening of the base to include heating and
all these others things?
Mr. Woolford: Yes.
Senator St. Germain: Are you sure your figures are accurate?
Mr. Woolford: Let me take you through you how we arrived at that. On page 1 of
the appendix we identify the areas of the savings as being capital
expenditures, catalogues and fliers, and telecommunications services. Some of
those items are currently taxed. When retailers purchase those goods and
services, they pay provincial sales tax on many of them, as Mr. Drummond said
this morning. Under the HST system, retailers will get that tax back. The 10
firms we asked to do a detailed audit of their costs identified that they would
save in the neighbourhood of $6 million of provincial tax. Again, we did a very
simple calculation. We do not want to pretend that this is rocket science. We
simply tripled it and said it would be somewhere around $20 million for all of
the retail trade. In addition to that, Atlantic Canada suppliers, Atlantic
Canada manufacturers, and Atlantic Canada transportation companies will also
have similar input tax credit savings. The cost of the goods and services they
sell to retailers will go down by a certain amount for the amount of tax that
they no longer have to pay to the provincial government.
Senator St. Germain: The government will have to get that from somewhere.
Mr. Woolford: It is getting it from clothing, heating oil --
Senator St. Germain: It is hitting the poor people, the little guy.
Mr. Woolford: The little guy is already paying for it because, as Mr. Drummond
pointed out, when the transportation company that carries the goods to Larry's
and Selma's stores pays tax on their truck, that is built into the price of the
transportation service, and the price of the transportation service, including
the tax, gets built into the price of the product that shows up in the store. So
the customer is paying that tax already in one form or another.
Senator Buchanan: But not on power bills or home heating fuels.
Senator Lynch-Staunton: I want to ensure that I understood what I heard. Do I
understand that the benefit of the input tax credits and the lower combined
sales tax will be more than offset by the additional costs incurred by the HST,
including tax-in pricing? The consumer, in effect, will be paying more than he
Mr. Woolford: No, that is not what we are saying. We are saying that the extra
costs of tax-in pricing more than offset the input tax credit. We have not said
whether they will offset the reduction in the tax. We cannot do that because
different retail products will carry a different tax rate under the new system.
Taxes on some products will go up; taxes on other products will go down. On some
products, the zero-rated items, the tax status will not change at all.
Mr. Durocher: But the ministry of finance has said that the net effect is
Senator St. Germain: We are into risky predictions.
Senator Lynch-Staunton: Do you agree that it is revenue neutral?
Mr. Durocher: We have to take their word in terms of the adjustment of the tax,
the lowering of the HST from the two independent taxes and the shifting of the
base to which it is applied. They have done the analysis on that. They have
said that overall the consumer will still end up paying the same amount of tax,
they will just pay it at different rates on different products. We accept that.
With regard to the costs and the benefits to us, we are saying there is a net
estimated incremental cost of $100 million.
Senator Lynch-Staunton: Does that mean that once you have factored in all the
costing and all the benefits, we will have to offer the same item pre-HST at a
higher price than post-HST?
Mr. Durocher: That is an option.
Mr. Woolford: It will vary with the product.
Senator Lynch-Staunton: If there are net benefits to the consumer here, we have
to get on to something else. If there are disadvantages to the consumer, we
want to focus on that.
Mr. Woolford: When the total tax rate comes down from almost 20 per cent in
Newfoundland to 15 per cent, that will be a net saving to the consumer that
outweighs even the extra cost of tax-in pricing. That is a significant drop in
the tax rate. We have never disputed that.
Equally, when the tax rate in Nova Scotia and New Brunswick comes down from 18
per cent and change to 15, that three-odd percentage points in reduction in tax
will probably more than outweigh the extra cost to the retail trade of tax-in
Overall, the consumer will see a lower price on his or her product. It will not
be as much lower as it should be because we will have to add in extra costs for
Senator Lynch-Staunton: But you will be able to pass those costs on and still
price your product the same, if not better, than it was priced before overall.
Mr. Woolford: That is right.
Senator Angus: We have been hearing all about why this tax-in pricing is bad and
confusing. Why do you think the government is legislating that? Is it to hide
the real increases that consumers will see?
Mr. Woolford: I would never want to speak for the federal government. The answer
it has given is that consumers want it. It has done opinion research which
shows that, as has research done by our member companies. Mr. Durocher was with
Woolworths when they did research before the arrival of the GST. They found at
that time that Woolworths customers wanted tax-in pricing.
We never disputed that customers would like to see the total final cost,
including taxes, presented to them before they get to the cash register. In all
fairness, governments are responding to the desire to give customers on one
level what they say they want. The problem is that the marketplace and
consumers are a lot more complex than that.
While they say they would like to see that, they also want to see a price that
is attractive. They respond to certain price points in a way that marketing
people like Mr. Durocher and Ms Rotman understand and ordinary folks like me do
not. However, they do respond to that 99-cent price point.
So, while the customer says, "I would like to see tax-in pricing", at
another level they respond to the marketing tools that firms use to present
their merchandise and their prices in the most practical way. That says that
customers are complex people who respond in different ways under different
circumstances. I cannot give you a better answer than that.
Mr. Durocher: There has been much speculation on the government's rationale or
motives for wanting this tax-in pricing. Governments in all three provinces and
the federal government have received representation after representation from
retailers saying that this tax-in pricing is bad. They keep getting that
message over and over again and for some reason think we have an alternative
I cannot figure out what that alternative agenda would be. The only reason we
are presenting this information is because we believe it to be bad. There is no
win in this for us. We support the HST. If you think about it logically, the
reason we are bringing these arguments forward again and again is because the
information is correct. This is a bad policy; it confuses customers and raises
costs. For some reason, that message is not getting through.
The Chairman: Thank you all very much for taking the time to appear here today.
Senators, our next witnesses are from the Canadian Restaurant & Foodservices
Welcome. As I recall, your association has testified before us in the past.
Mr. Michael Ferrabee, Vice-President of Government Affairs, The Canadian
Restaurant and Foodservices Association: I should like to deliver the apologies
of director John Rothschild of Prime Restaurants. He enjoyed watching the
process and was disappointed that business prevented him from staying until now
to make his presentation.
Thank you for taking the time to hear our concerns about Bill C-7O. Our
association is one of the largest trade associations in the country, regardless
of sector. We have more than 13,500 members representing more than 40,000
outlets in Canada. Our industry employs 840,000 Canadians from coast to coast,
almost half of them young people. Our sales represent 4.3 per cent of Canada's
gross domestic product.
Our concerns with Bill C-70 centre almost exclusively around the tax-included
pricing provisions of the bill. We recognize and appreciate that there will be
a net decrease in the cost consumers pay for meals of as much as 4 per cent.
For this region, this is important. However, we believe that the benefits of
the HST are seriously compromised by the heavy-handed attempts to force
businesses to include the tax in the price of goods and service. We are
concerned that this unprecedented intervention in the marketplace to control
price could have a damaging effect on our industry.
In particular, I would like to highlight the following concerns: We believe that
tax included pricing will further exacerbate the inequalities now present in
the GST, decrease the advertising dollars spent in the region, make many
national advertising campaigns unworkable, and lead to unnecessary confusion in
the local market place. We are also concerned with the seeming unwillingness of
the provinces of Newfoundland and Nova Scotia to explain how they intend to
deal with the harmonized tax on beverage alcohol.
Many of you are aware of the devastating impact the GST had on our industry. In
1991, we saw a 10.6 per cent drop in our sales nationally and a dramatic
erosion of our market share. Record bankruptcies forced our industry to
eliminate 46,000 jobs in this one year. An Ernst & Young report done after
the fact identified the biggest culprit in this devastation, that being the
GST. More than two-thirds of the damage done in 1991 was directly attributable
to the GST.
Since 1991, we have had to contend with the inequalities that the tax created.
Our closest competitor, prepared meals available in food and convenience
stores, remains tax exempt, while meals we serve are taxed. This led to a
dramatic erosion of our market share which we have not yet recovered.
Our first concern is that this tax-included pricing will further amplify, in the
minds of consumers, the differential between prepared meals that are tax free
and those we can provide. Our advertised prices will have to go up by 15 per
cent, while the price of a similar meal available in a grocery store will
remain the same.
Price and price points are key to our industry. It has been the only way that
many have been able to survive in the competitive 1990s. You will all be
familiar with the key price points from our sector, including the $3.99 meal
deal and the $9.99 pizza special. Forcing industry to change these price points
because they must now include tax will dramatically destabilize the market
place, add huge, new costs to our marketing efforts and make many national
advertising campaigns unworkable.
One company in our industry has estimated that they will be forced to trim their
advertising budgets for Atlantic Canada by as much as 40 per cent because of
the new costs associated with producing separate advertisements for the
Your committee should also be aware that the tax-included pricing plans will
have a distorting effect on the advertising market. Many specialty TV channels,
including Newsworld, TSN, YTV and the Discovery Channel do not have the ability
to do regional breaks for Atlantic Canada. Some national magazines and other
publications face the same problem. Many of the large advertisers in our
industry will simply stop advertising in these media if they are forced to
highlight the tax-included price for Atlantic Canada. Rather than dilute the
investment they have made in price points in the rest of the country, they will
simply shift their advertising strategies to segment out the Atlantic region.
It is not only the national chains that will be affected by tax-included
pricing. Forcing local operators to go tax-included will also affect the local
market, not least of all because of the difficulty in enforcing the
regulations. Price points are a key tool for many in attracting customers to
their doors. If even one operator in a local market continued to advertise on a
tax-out basis, it could have a dramatic effect in that marketplace. Faced with
a prolonged period where the local market was distorted by a non-complying
store, law abiding restaurateurs may be forced into the unenviable position of
either breaking the law to compete or closing down their operations. Yet, the
governments have not indicated that they intend to provide any additional
resources for enforcement.
Finally, our industry is troubled by the continuing silence in the provinces of
Newfoundland and Nova Scotia with respect to how they plan to deal with the
beverage alcohol pricing in their provinces under HST. The province of New
Brunswick has indicated that it intends to pass on the savings from the reduced
tax rate to both consumers and operators. The other two provinces have yet to
lay out their plans, despite regular representations from our industry.
In conclusion, our industry is very concerned about the tax-included pricing
provisions that form part of this government's initiative under the HST. The
very real decrease in the overall tax rate that consumers will be forced to pay
in these provinces is a step forward, but the tax-included pricing plan
seriously compromises legislation.
We are aware of a compromise position that would substantially address our
concerns. This compromise would maintain tax-included pricing for in-store
sales and advertising but exempt all out-of-store advertising. The compromise,
first raised at the committee deliberations in the other place, has the
advantage of resolving the problem with national advertisers while keeping a
level playing field for all the industry in the region.
I think you have a copy of my brief. That is a quick summary of our position in
The Chairman: I wish to ask you to follow up on your last point. You raised this
alternative which would be tax-inclusive pricing in the store but not through
advertising. You said you raised that in committee in the other place. Have you
had any feedback from the government on it?
Mr. Ferrabee: To be fair, we did not raise it with the committee in the other
place; the committee raised it with us. Toward the end of the session, they
asked us directly what we thought of the possibility of allowing all outdoor
advertising with the disclaimer that would say "plus tax".
In consultation with a couple of industry people there and in consultation with
our tax advisory committee, which is made up of the industry's senior tax
people from across the country, the feeling was that it would address most of
our substantial concerns with tax-in pricing.
The Chairman: I understood that, but did you have a reaction to that idea?
Mr. Ferrabee: We had a reaction from the committee chairman who said that he
thought it would be one of the issues that he would raise in the house. His
office continues to tell me that the list of issues he wanted to raise will be
forthcoming at some point. It was not part of his report.
The Chairman: The short answer to my question is that you have had no feedback
from the government.
Mr. Ferrabee: We have had some feedback from the government in talking to
officials, and they are aware of our representations.
The Chairman: What has been their reaction?
Mr. Ferrabee: At the official level?
The Chairman: Yes.
Mr. Ferrabee: Generally neutral.
Senator St. Germain: Is there a constitutional violation here? As long as you
collect the tax and remit it, is there a question of an infringement on the
rights of people?
In this country we pass so much legislation and have become so dictatorial.
There will be a negative impact on many people if this tax-included price
prevails. If there is an infringement on the constitutional rights of people
doing business, as long as you collect the tax, where does that sit? Has anyone
thought of that, or is it too far fetched?
Mr. Ferrabee: This is the first time I have heard it raised. It would be
interesting to know whether there would be a constitutional challenge to the
right of the government to regulate in an area such as price. I am neither a
lawyer nor a constitutional expert.
Senator Meighen: That makes your opinion particularly valuable.
Mr. Ferrabee: On the broader issue, my understanding is that it is unprecedented
for a government to regulate in the area of pricing. Many of the people in our
industry do their business on key price points.
In our brief there is a compelling chart from one of Canada's large food service
chains which shows the dramatic effect that changing price points can have on
sales. They bundled coffee and a muffin and advertised that for 99 cents in one
region. They then unbundled the two products and raised the price. The chart
shows what happened in that region when they did that. Sales fell by almost 50
per cent as a result of the change in the price point. That is the reality that
much of our industry is facing, to say nothing of the enormous costs of
segmenting-out for advertising purposes.
Senator Angus: Mr. Ferrabee, you have been here all morning listening to the
Mr. Ferrabee: Yes, I have.
Senator Angus: Do agree with the evidence that the witnesses from the Retail
Council of Canada gave? Is there any part of it with which you would disagree?
Mr. Ferrabee: We have been working with the retail council since this
legislation was introduced and we share all of their concerns in terms of
tax-included pricing. I believe the retail council led the coalition in favour
of harmonization. That is not something to which we adhere. On the issue of
harmonization, we have a disagreement; on the issue of tax-in pricing, we are
Senator Angus: That is the answer I hoped you would give. Could you explain
where you differ on the issue of harmonization? What is your position on that?
Mr. Ferrabee: The larger issue is that the rest of the country, in terms of
harmonization, must be dealt with on a regional basis. On balance, we were
supportive of the efforts of the government to harmonize the tax in Atlantic
Canada. There were some downsides and some upsides. For the most part, we
thought it would probably be revenue neutral. We share very much their concerns
about tax-in pricing. The only difference that we have at this point concerns
the compromise position that I mentioned, which talks about the possibility of
resolving the national advertising problem through allowing outside-the-store
advertising to be tax excluded and keeping inside-the-store to be tax included.
Senator Angus: You heard the chairman paraphrase what he understands this
compromise to be. It was different from what you said. For the record, could
you explain how it would work using a commodity or a restaurant, for example?
Mr. Ferrabee: I will use our industry, which is the one that I know the best.
Let us take an example of a quick service chain that advertises a $3.99 meal
deal. They do it across the country and in all forums. They do it in print
advertising, on radio and on television. They would not advertise that same meal
deal at $4.56 on the specialty channels, for example, because that would damage
their sales. The compromise I am suggesting would allow them to continue to
advertise a price of $3.99 from sea to sea, with a disclaimer. It is easy
enough to draw up regulations about what that means for TV. However, if we
imagine a print ad, it would have to have an asterisk with words to the effect "plus
applicable taxes" underneath.
Senator Angus: Let us say it is McDonald's. In the restaurants in Nova Scotia
they would have to show $4.56?
Mr. Ferrabee: Absolutely.
Senator Angus: With no reference to the $3.99 at all?
Mr. Ferrabee: The regulations as they were drawn up, which were released in
December, suggest that you could show $3.99, plus 57 cents, which equals $4.56,
as long as the $4.56 was the same size or larger than the other.
That is not ideal for our industry; but that kind of distinction merits serious
consideration because it solves the national advertising problem. It solves the
bulk of our concerns. We can change menu boards; but it allows us the critical
price point on many of our quick service meals, including the $9.99 pizza.
Local regional pizza chains support this as well.
Senator Angus: The comments on enforcement in your brief interested me. The
bottom line I got out of that was, "They will not be able to afford to
enforce it properly. It will be tremendously unfair to local sole proprietors.
Everyone will disobey the law. Therefore, you should get rid of tax-included
Mr. Ferrabee: I would not go so far as to say that everyone will disobey the
Senator Angus: There is a great incentive to disobey it.
Mr. Ferrabee: Imagine a circumstance in rural New Brunswick where there are two
pizza stands side by side. The dutiful one who wants to comply with the law
changes the "$9.99 plus tax" sign to "$11.49", while the
other one leaves the sign at "$9.99 plus tax". There has been no
indication from government officials that it plans to put additional resources
toward this. Even if there were officials to police this, the chances of them
getting into rural New Brunswick are slim.
To come back to the issue of consumers, one way this has been raised by the
government and people who support it is that consumers have the right to know,
that consumers are very important in this whole process and they want tax
We had a similar experience with consumers which was highlighted by one of our
directors when he appeared before the other committee. One large Canadian chain
does surveys on a regular basis. They ask consumers what they want and
consumers consistently say that they want salads, lean meats and fruit juices.
When you ask Canadians what they want to consume, those are the three things at
the top of the list. What they actually eat, of course, are fries, burgers and
That just illustrates the difference between the way consumers respond to
surveys about big picture questions and the realities of the marketplace faced
by our industry.
Senator Angus: Another thing you mentioned is the beverage alcohol deal in
Newfoundland. I did not fully understand how that works. Could you explain it
Mr. Ferrabee: There has been an expectation that with a lower combined rate, in
some cases coming from the high of 19-plus down to 15, there will be a savings.
There is no question about that.
Senator Angus: On some items.
Mr. Ferrabee: Yes, on some items.
Senator Angus: It might go up from 7 to 15 on some.
Mr. Ferrabee: This is on items presently taxed under both the GST and the PST.
Beverage alcohol is one of those.
Senator Angus: Do you mean it is one that will go up?
Mr. Ferrabee: No, it is one that should be saved. Our industry identified this
early on and made representations to all three provincial governments, assuming
that they would pass on those savings directly to both operators and consumers.
The province of New Brunswick was quite quick off the mark and announced that it
would be passing on the savings directly to consumers and operators in our
Senator Angus: How will they do that?
Mr. Ferrabee: Simply, the overall tax rate is coming down. Governments have to
behave the same way as retailers and everyone else is expected to behave which,
one assumes, means passing those savings on to consumers. We assumed that all
the way through. New Brunswick has agreed to do that.
Senator Angus: How would they pass it on to consumers?
Mr. Ferrabee: By way of lower prices. They would bring the overall price down by
whatever the marginal rate is, which makes sense because it is government
Senator Angus: Like Quebec, they have the monopoly on beverage alcohol. Is that
Mr. Ferrabee: Yes. We expected the same in both Nova Scotia and Newfoundland
and, very much to our distress, especially with only a month before this
measure is to come into force, the government is looking at its revenues and
saying, "Well, it is okay if consumers save on this stuff, but when it
actually comes out of our pocket we are concerned about it." We have yet to
get a straight answer from them, despite representations almost weekly from our
Senator Angus: I take it you are asking us to recommend that to these provinces.
Mr. Ferrabee: Yes.
Senator Angus: We do not have much clout with them. Is it your hope that this
would be in our report to the Senate?
Mr. Ferrabee: I certainly hope that in your report you will identify a number of
issues. One would be that we have yet to get a clear answer from the other two
provinces. As well, we hope that they follow the decision that has already been
taken in New Brunswick.
Senator Angus: When we meet them down there next week, we should probably
suggest to them that that will be cheaper.
Senator Stewart: In your written brief, you state:
The GST institutionalized a discriminatory regime that gave a tax break to the
foodservice industry's closest competitor, prepared meals available in grocery
and other food stores.
I notice that many people are buying frozen packaged food. I also notice when I
buy it that very often it is made in the United States. To extrapolate from
what you have said, your argument is that the present regime is disadvantageous
to Canadian restaurants and favours the packager of frozen foods imported from
the United States. Is that correct?
Mr. Ferrabee: I would not identify the United States because I have not done the
research about where they are located.
We have appeared before various committees, as we have probably been at this
committee before, with our $700 tin of caviar which gets away tax free and a
carton of milk bought at a quick-service restaurant which gets taxed. That does
not make any sense to me.
You can buy a fully prepared pizza in your local grocery store, ready to eat
except for heating, which is not taxed. However, if you buy one from one of our
takeout stands, which hires people to serve it and deliver it to you, it is
taxed. It is tax free at the local grocery store but the job component that we
add is taxed.
As far as we are concerned, that is a tax on jobs. It is no surprise to us that
we are running at a 17 per cent youth unemployment rate when 46 per cent of the
employees in our industry are under the age of 25.
Senator Stewart: I am sure you raised this point when the GST was being enacted.
What was the basis on which your argument was rejected?
Mr. Ferrabee: I was not here. I was not working for the association at the time,
so I do not have firsthand knowledge of that. My understanding is that it was
to the effect that we have to draw the line somewhere. To be fair, I think it
got swept up in the entire issue of taxing "food". Since then, I have
been surprised by the enormous support and sympathy for our cause on the issue
of prepared foods principally -- not taxing wheat and flour and bread, but on
the issue of prepared foods. There was enormous sympathy from virtually every
legislator to whom we have spoken. Nothing has been done.
Senator Meighen: Just for the record, from the perspective of your industry, if
there were no tax-in pricing or if the compromises to which you refer were
adopted, do you see any problems? Does it make collection and remittance of the
tax any more difficult for your industry?
Mr. Ferrabee: I asked our tax advisory committee that question. My understanding
of the administration is that you will be allowed to keep the same GST number
and just switch it over to HST. For the sake of our industry and the manner in
which we go about doing that, it will not be a significant difference in terms
of the collection. The short answer is that they do not seem to think
collection is a problem; their major concern is with tax-in pricing.
Senator Meighen: Yes, but if it were abolished, the answer would be "no"?
Mr. Ferrabee: That is correct.
The Chairman: Mr. Ferrabee, thank you for your brief. You have helped us by
giving several specific recommendations at the end.
The committee adjourned.