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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

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 bill.

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.

Please proceed.

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 harmonization.

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 trade-in.

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 tax-included pricing.

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 interprovincial sales.

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 paid.

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 significant involvement.

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 disadvantage.

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 activity.

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 provincial perspectives.

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 explanatory notes.

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 years.

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 bill.

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 that.

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 otherwise.

Senator Angus: We are told that this is a revenue bill. Do you subscribe to that?

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 Newfoundland.

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 have.

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 departmental employee?

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 situation helped.

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 versa.

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 arrangement.

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 amount.

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 government.

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 about here.

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 for compensation.

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 plain legislator?

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 complexity.

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 the tax.

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 1?

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 they not?

Mr. Drummond: Under various conditions, if there is agreement, that provincial share can be changed. Under certain conditions, they can either raise or lower it.

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 own way.

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 province?

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 agreement.

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 tax.

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 rate.

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 unanimity.

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 themselves.

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 clear.

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 understanding.

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 alone?

Ms Dantzer: You will have to ask Revenue Canada. I understand they will be appearing.


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 period.

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 transaction.

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 included.

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 or $150.

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 believe.


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 credits.

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 that aspect.

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 sector.

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 have.

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 positive.

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 points.

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; correct?

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 Finance.

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 HST.

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 advertising.

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 consumers' desire?

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 Liberal tax"?

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 harmonization.

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 business input.

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 business taxation.

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 consumer level.

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 instantaneously.

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 their inputs.

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 system?

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 competitors.

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 maritime region.

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 detriment.

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 GST.

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 tax credits.

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 Bill C-70?

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 renew.

Senator Angus: Is it not a fact that at the present time you are considering layoffs?

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 tax.

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 major purchase.

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 not support.

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 from.

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 consumer.

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 committee.

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 organization.

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 could.

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 policies.

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 exact price.

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 like.

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 neutral.

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 cent probability?

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 Scotia".

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 umbrella.

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 shelves.

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 productivity.

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 retailers.

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 retailers.

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 sales tax?

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 pays now?

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 revenue neutral.

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 pricing.

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 tax-in pricing.

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 agenda.

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 Association.

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 Atlantic region.

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 industry.

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 other witnesses.

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 very supportive.

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 pricing."

Mr. Ferrabee: I would not go so far as to say that everyone will disobey the law.

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 included.

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 cokes.

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 more fully?

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 industry.

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 taxing government.

Senator Angus: Like Quebec, they have the monopoly on beverage alcohol. Is that your point?

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 Atlantic office.

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.