Proceedings of the Standing Senate Committee on Banking, Trade and
Issue 19 - Evidence - Afternoon sitting
OTTAWA, Wednesday, February 26, 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 1:05 p.m. to give consideration to the
Senator Michael Kirby (Chairman) in the Chair.
The Chairman: We will continue our discussion on Bill C-70. We have three
witnesses this afternoon, all from different parts of the federal government.
We begin with the Honourable Jane Stewart, Minister of National Revenue.
Honourable Jane Stewart, P.C., M.P., Minister of National Revenue: With me today
are Mr. Mike Burpee, Mr. Bill Baker, and Ms Ruth Dantzer who comes to us from
the Department of Finance.
Thank you for allowing me to speak to the committee on Bill C-70. The bill is
designed to accomplish two things. First, it proposes legislative amendments to
simplify and improve the GST. These technical amendments were originally
proposed in April of last year and have been further refined in consultation
with affected industries and sectors.
The second part of this bill will implement the harmonized sales tax in the
provinces of Nova Scotia, New Brunswick, and Newfoundland. As of April 1, 1997,
the harmonized tax will replace the GST and provincial retail sales taxes in
The harmonization of sales tax is an historic development in the relationship
between the federal and provincial levels of government. As federalism matures,
governments will continue to be called upon to find creative solutions to new
challenges and to reduce overlap and duplication. These demands will require
governments to re-evaluate their traditional, jurisdictional roles with a view
to serving the best interests of Canadians.
The harmonization agreement implemented by this bill is an encouraging harbinger
of innovations to come, not only in the domain of taxation but in many other
During the next few days, finance ministers from the participating provinces
will be appearing before this committee to talk about harmonization from their
perspective. Time and time again, the federal government has argued forcefully
in favour of harmonization. We and other advocates have consistently
highlighted the many benefits that it will bring to businesses, governments and
customers. Many thorough and convincing arguments have been made in support of
these benefits. Nonetheless, hearing about these benefits directly from the
finance ministers of these provinces is an essential part of this process. I
believe that their perspective on this will make the case for harmonization
even more compelling.
The governments of the participating provinces have long told us that what they
really need is to be able to compete on an equal footing. This is precisely
what Bill C-70 achieves. It will make these provinces more competitive. In
fact, the premiers of those provinces have referred to the sales tax
harmonization as "the Atlantic advantage", and justifiably so.
Just last week, the Atlantic Provinces Economic Council predicted that the
harmonized sales tax will feed a consumer spending boom of up to $120 million
per year. The council also estimated that businesses will save more than $580
million under the harmonized system. That is $580 million per year. This is not
merely a one-time gain. Rather, the council is predicting a sustained long-term
How will this harmonization of sales taxes make businesses more competitive? In
the participating provinces, provincial retail sales tax will no longer be
buried in the cost of goods that are exported to other countries or, for that
matter, to other provinces. As far as administration is concerned, businesses
in the harmonized system will no longer have to keep track of two separate sales
taxes. There will only be one set of rules to follow, not two. For each
reporting period, there will only be one sales tax return, not two. The
participating governments will save money for there will only be one sales tax
administration, not four.
Eliminating overlap and duplication will save money. Governments, businesses and
consumers will share in the savings. These are the economic and administrative
benefits that will promote competitiveness.
The other component of the Atlantic advantage is increased spending by
consumers. How will harmonization stimulate this consumer spending?
Essentially, there are two considerations, one of which is the removal of sales
tax from business inputs. Businesses now have no way of recovering the
provincial retail sales tax they pay on their inputs. These taxes create an
added expense for them. Firms have no choice but to pass this expense on to
their customers. Under the harmonized system, embedded tax will be a thing of
The second and perhaps more immediate point is that harmonization will result in
a lower tax on many goods. The 15-per-cent harmonized sales tax rate amounts to
a rate reduction of almost 4 percentage points in Nova Scotia and New
Brunswick. The reduction for Newfoundland consumers will be almost 5 percentage
It really does not matter which side of the equation you look at -- government,
business, consumers -- all of the indicators are pointing to an Atlantic
advantage. The harmonization of sales taxes holds the promise of a more
competitive business environment and a healthier economy in the participating
provinces. If it is good for them, then it is good for Canada.
In fact, this bill provides the legislative framework on which future
harmonization agreements may be based. This is not an unrealistic expectation.
As the real benefits of Atlantic harmonization become evident, other provinces
will be motivated to join in. In this way, the Atlantic advantage could well
set the stage for the "central advantage" and the "western
advantage" of the future.
As honourable senators are aware, a key feature of the harmonized sales tax is
the tax-included pricing requirements. Tax-included pricing responds to the
clearly expressed wishes and preferences of consumers. Canadians have told us
that they are sick of seeing one price and paying another. Successful retailers
have given us this slogan: The best surprise is no surprise. This is the thrust
of what Canadians have been telling us. They are sick of being surprised at the
Given the overwhelming consistency of anecdotal evidence to this effect, it is
not surprising to learn that this point of view is borne out by public opinion
In a recent poll, 79 per cent of respondents supported tax-included pricing. It
is certainly rare to achieve consensus of such a magnitude on any issue.
The allegation that we are trying to hide the tax just simply does not stand up,
but that does not stop critics from standing up and accusing the participating
governments of trying to hide the tax from consumers. The tax will remain
visible to consumers. From day one, a key feature of the tax-included pricing
requirements has been that the amount or rate of sales tax shall be disclosed on
the receipts. Of the individuals polled, 69 per cent believe that this
requirement is sufficient to ensure consumers always know how much tax they are
The participating governments are unwavering in their resolve to accommodate
consumers' desire for tax-included pricing. However, we recognize that
businesses also have needs that must be met for the pricing requirements to
function in today's marketplace with minimal disruption. To this end, we have
worked with the business community to identify problems that tax-included
pricing might pose for vendors. The guidelines for tax-included pricing contain
practical solutions that address these problems head-on. For example, the
guidelines allow for dual pricing. This means that the before-tax price may be
displayed alongside the tax-included price. In addition to allaying vendors'
concerns about the perception of price gouging, dual pricing would give
consumers more information about pricing than they have ever had before.
The guidelines allow several options for disclosing the amount or rate of tax on
receipts. These options mirror the capabilities of existing point-of-sale
equipment so that reprogramming costs can be kept to a minimum. The guidelines
provide a variety of pricing options to address concerns about the potential
compliance burden associated with reticketing prepriced goods. These options
include bin and shelf pricing, and in some cases price conversion tables.
Other steps are being taken to ensure that national advertisers will not be
forced to bear the expense of producing separate editions of catalogues to
comply with pricing requirements in the harmonized region.
A more general concern about the pricing requirements that has arisen in recent
weeks is that a failure to comply with them will be treated as a criminal
offence. On this point, I should like to clarify that the legislation views
non-compliance as a regulatory offence, not a criminal offence.
I should now like to draw the committee's attention to Bill C-70's proposed
technical improvements to the sales tax system. As I mentioned when I began my
remarks, the first part of the bill contains technical amendments to the sales
tax system that will apply not only in harmonizing provinces but also right
across Canada. Many of these proposed amendments have been designed in
consultation with representatives of the specific sectors that they are
intended to help. For example, this legislation contains measures that will
strengthen the competitive position of Canadian firms involved in international
Bill C-70 will improve the operation of the sales tax rules in the health and
agriculture sectors. It will also make the rules simpler and fairer for
charities, especially smaller charities. This bill provides a 100-per-cent
sales tax rebate on books purchased by certain educational institutions and
public sector bodies. This measure will promote literacy and address concerns
about the impact of GST on reading materials.
This legislation will make the sales tax rules simpler for thousands of
municipalities across Canada and will also resolve several issues relating to
the treatment of real property.
There are numerous examples of how this legislation will make the sales tax
system simpler and fairer for Canadian taxpayers. As the movement towards full
harmonization gathers momentum, it will always be important to remain open to
technical innovations and improvements to the existing sales tax structure.
This is the model that will form the basis of the harmonized sales tax. It is
also the structure with which businesses and non-harmonizing provinces will be
living until their governments agree to enjoy the benefits of harmonization.
The value of structuring the harmonized sales tax along these lines cannot be
overstated. This approach ensures that the transition to harmonized tax will
not cause disruption and confusion for businesses.
There are several factors signalling a smooth transition to the new system. For
example, the harmonized tax will have the same tax base and the same basic
operating rules as the GST. There will be no requirement for GST registrants to
obtain new registration numbers, and businesses already know and understand the
rules for claiming input tax credits. These rules will continue to apply under
the harmonized sales tax. An orderly and seamless transition is essential to
Atlantic business communities, as it is to any Canadian or foreign business
with dealings in the participating provinces. The value of smooth transition is
not lost on our provincial counterparts, for their legislatures have given
their respective harmonization bills priority treatment.
It is clear that all participating governments and affected businesses have a
stake in seeing Bill C-70 passed in an expeditious manner. I therefore urge
honourable senators to support Bill C-70.
I thank you, Mr. Chairman, for the opportunity to be here to discuss it further.
Senator Lynch-Staunton: Minister, it is nice to see you here.
Before I start to ask questions, I should like the indulgence of the chair and
the committee to clarify the position of the PC senators on this bill resulting
from a news report which I understand was circulated with enthusiasm by the
government side this morning. The Sales Tax Division of Finance Canada are the
authors of the distribution. In any event, the position of our caucus is quite
clear. If the article is not, I will take the blame for it. I do not like
pointing fingers at others.
When we were in government, we initiated the GST and we are glad to see that the
Liberal government has adopted it. When Michael Wilson was Minister of Finance,
he tried to implement a national harmonization scheme. Unfortunately, he did
not receive national support, so he abandoned it.
There are elements in this bill which we support. There are also many elements
which we do not support. We will get to that. You have seen already, during the
testimony over the two last days, what our anxieties are, and others will build
up as we go into the maritimes next week. More will be developed today. The
point of all that is that, as it presently stands, this bill does not have
caucus support. It does not have the support of most if not all of my
colleagues. I have come to this understanding through an informal poll, and I
leave it at that.
We hope there will be amendments to this bill, which we intend in time to bring
to the attention of the committee. If not, we will bring them to the chamber at
third reading. If they fail, then our position will become clearer on this
bill. At the moment, we insisted on hearings in the maritime provinces in order
to get a better feel for some of our anxieties and, if at all, perhaps through
the appearance of the minister and later through the Minister of Finance, have
our views altered or confirmed, depending upon the weight of the arguments
which we will be called on to assess.
Senator Buchanan is not a rogue senator. We have no rogue senators in our
caucus. We are all as one on this, as we are on all major legislation that
comes to the Senate. If there has been confusion and misunderstanding as a
result of an article, I take the full blame for it. I apologize to my colleagues
for having caused some anxiety. This is part of the learning process --
certainly my learning process -- and I hope the remarks I have made now have
clarified the situation for all those who are following this bill.
The Chairman: Senator Buchanan and I have jointly been called rogues by many
people we know in common, and I am not sure we would even take that necessarily
as a insult.
Thank you for making your statement.
Senator Angus: Bill C-70 is a fairly imposing document, I am sure you will
agree. Why did your government find it necessary to proceed at this time with
both of these matters? With regard to the technical things, which are
improvements to the GST that have been in the works for sometime and which have
come to light with practice and experience with the tax, it would be quite
logical, convenient and appropriate to deal with them in a separate bill and
not to come forward now with this so-called harmonized tax. Could you explain
that for us?
Ms Stewart: In our commitment to Canadians, we insisted that we wanted to
develop a system that was simpler and fairer to consumers. As we looked at the
appropriate strategies and thought about the alternatives to the GST, we
understood that it was simpler and fairer. We identified that having a
harmonized structure and a single administration with the provinces was critical
as well. All this was part and parcel of our original commitment of our
original review. As we crossed the country as members of the Finance Committee
of the House of Commons, these issues all came to us simultaneously. That is to
say, the issues of technical changes required and the importance of moving
toward harmonization. For us, the logic of having it in a comprehensive bill
makes sense and responds to the original commitment that we made to Canadians.
Senator Angus: I understand what you are saying up to a point, but in terms of
being responsive to my question, it seems to me that it would be much more
logical to hold off the HST part of the bill, or Part II, until such time as
you have British Columbia, Ontario and Prince Edward Island onside. I fail to
understand the urgency or the need at this time to proceed.
Ms Stewart: Again, I would point out -- and you will find this as you travel and
conduct your hearings -- that both issues of technical and structural
importance will be presented to you. That certainly was the case with us.
To present the bill in a comprehensive fashion was important. When we talk about
the actual structural changes that you identify, we only have three very
important provinces who are ready to proceed and to provide the advantage to
their own communities. If we look back at other government legislation, it is
not always the case -- in fact, it may be rarely the case when all the provinces
come on together. For us, moving together with both the technical and the
structural changes makes sense. It allows us to get the technical papers out
there at once and to have the debate in a comprehensive fashion. Again, you
will find that everything intertwines.
I do not see any difficulty with proceeding with the three provinces at this
time who are ready to go, want to take the advantage and want to prove that the
economic realities of harmonization will be great to their economies.
Senator Angus: That is an interesting answer. I suggest to you that the real
answer is found somewhere in this Red Book that I have in front of me.
Ms Stewart: It is on page 22.
Senator Angus: I have been reading it with great interest. That explains more
the rush to try to bring in a bill at a time when it is creating more chaos
than order in the system.
My colleagues and I were wondering why the government decided not only to pay
these three provinces an amount just under $1 billion but also to offer and
agree to give them a flat tax and a capital tax fully administered and
collected by the federal government with no expense whatsoever to the
provinces. Why was this done if not for political expediency?
Ms Stewart: Without question, we understand -- and, I think Canadians also
understand -- the value of moving to a harmonized sales tax structure.
Senator Angus: It was Conservative policy before, so you are picking up on that.
Ms Stewart: We are trying to fix it.
Senator Angus: You are doing a very bad job.
Ms Stewart: Not at all. In fact, as we crossed the country and looked at the
alternatives, it was clear to us. We looked at over 20 alternatives. As a
member of the Finance Committee, I was convinced -- as were many of my
colleagues -- that we would find an alternative. A business transfer tax was one
alternative that was very much in the forefront of our consideration. As we
talked to Canadians and as we got down to the issues, the message that came
back to us was, "You must collect $18 billion net. We do not want you to
replace one structure with something that could be equally bad or worse. We are
getting used to this thing called the GST, but you can fix it. You can make it
easier and simpler for us. You can harmonize it with all the retail sales taxes
that we have. You can have a single administrator and you can have tax-included
pricing." For us to move ahead with that responds to the interests of
Canadians in the long term.
As we consider that and look at the energy put into this from the three Atlantic
provinces that have decided participate, we cannot hold them up. They are ready
to go. They see themselves as having an economic advantage by moving quickly
towards this harmonized tax structure. We are prepared to move quickly. We set
April 1 as our date.
Senator Angus: Could you answer my question concerning the nearly $1 billion and
this free deal that you are not extending to Manitoba, Saskatchewan, and all
the other fine provinces?
Ms Stewart: Talking about the system, we believe in the harmonized rate and the
harmonized structure. Whenever we make real structural change like this -- and,
it is something very different from what we have had before; we are seeing that
here -- we do assist and ensure that there will not be big losers. In this
particular case, we have identified and have agreement with the provinces that
in the course of four years, the full value of the economic benefits of a
harmonized sales tax will be realized in those provinces.
Having said that, for the first few years there will be a revenue loss for some
provinces. We know what the base will be and what the expected revenue
generations will be like. We had to sit back and say, "How do we help this
happen?" We picked a number and identified, for those provinces who will
have more than a 5-per-cent drop in their revenues, some kind of structure to
encourage them to come into the new system. It is not only the Atlantic
provinces that can benefit or participate in that formula but also Manitoba and
Saskatchewan. For other provinces, it is not a circumstance where they will
experience significant revenue losses. It is much easier for them to move into
the harmonized system. As it has been with the WGTA change, with the changes to
dairy subsidies, and with so many other structural changes that our government
has undertaken, the logic is to provide time and sometimes to provide
compensation while ensuring that we move towards something that is positive for
Senator Angus: When does this new system as contemplated by Bill C-70 come into
Ms Stewart: We are hopeful that it will come into effect April 1.
Senator Angus: April 1, 1997?
Ms Stewart: The harmonized sales tax structure, yes.
Senator Angus: I understand the payments of this $961 million to the provinces
began to be made last fall. What is this all about?
Ms Stewart: Part of that was --
Senator Simard: Cooking up the books, I think.
Ms Stewart: I think not.
Senator Angus: I would love to hear your answer, but I should add that we posed
these questions to your officials and to your colleague Mr. Martin's officials
from the Department of Finance. They accurately pointed out that there is a
political overtone to these questions that would be better answered by the
minister. We are all anxious to hear your answer on that.
Ms Stewart: We want to ensure that we make the transition as effectively and as
conveniently as possible. The moneys were there and the agreements have been
signed. The memorandums of understanding have been developed over a period of
time. The agreement has been proceeding for a period of one year. We introduced
the notions in the last budget and have been working very closely with the
provinces to get the MOU signed, to get the technical papers out, and to deal to
get their legislation in place and our legislation in place. This has been
occurring over the course of the year.
Senator Angus: What if Parliament decided to vote down the bill? It is kind of
an unbelievably arrogant approach to life.
Ms Stewart: We want it in place and ready to go April 1. We know that the
business community is ready to proceed. They are preparing for it. They want it
implemented. We anticipate that the April 1 date will be met.
In terms of encouraging the structural change, recognizing that we must support
these kinds of significant challenges and improvements to our tax regime and
others, these kinds of payments and supports are appropriate.
Senator Angus: They are helpful. It is pump priming.
Could you share with us what, for example, Manitoba and Saskatchewan had against
it? If it is so great for the maritimes, what answers did they give you?
Ms Stewart: As we look at anything with regards to taxes, it becomes a very
political event. There are issues of politics and understanding the details.
The complexities of a multi-level tax are just that, namely, extremely complex.
Honourable senators will have been interested to learn the differences between a
multi-level tax, a single-level tax and the implications for input tax credits.
I do not know that everyone in every province has taken the time and focused.
They have had their own agendas, namely, trying to understand their own
priorities and the commitments that they have made to the constituents of their
Without doubt, my expectation is that as the Atlantic advantage is fully
experienced and understood by the non-harmonized provinces, they will come on
Senator Angus: It appears to my colleagues and myself -- and, this is along the
same spirit of this book -- that tax legislation seems to be much less complex
when you have a Liberal government in the local legislature. Is that a bizarre
Ms Stewart: The senator is right. Although I have not had the tenure with this
issue that many senators have had, having gone through the full review on the
Finance Committee and hearing where the consensus was built, it was a
surprisingly good piece of public policy which was written on page 22 of the
The honourable senator could review the transcripts of the conversations that we
had with individuals and businesses right across this country, including small
locations in Atlantic Canada, because we got out of the big centres such as
Halifax and Montreal and went to Yarmouth. People said, "The answer here
is not something new and completely different. It is something that is
improved. It is something that gives us a consumption tax regime that is solid,
stable and efficient."
Page 22 says that we want something simpler and fairer. We want it harmonized.
We want a single administration. We want tax-included pricing. Those were the
messages that the committee heard from Canadians.
Senator Angus: The message we are hearing from the vast majority of the
witnesses who have been in touch with us and from the briefs that have been
submitted is that it is unfair and an administrative nightmare. This tax-in
pricing simply does not work. The place of supply rules are completely counter
to what they were under the GST and they result in substantial inequities.
We are hearing that the officials in your department find it an absolute jungle.
They do not know how they will be able to enforce it. They are wondering what
their colleagues in finance were up to.
Could you tell us whether or not there seems to be a dispute going on between
the officials in the two respective departments?
Ms Stewart: Actually, none at all. I do not know where that would have come from
because we have worked closely with the Department of Finance, as we have been
administering the GST to date, identifying areas where simplification is
If honourable senators look at the documentation in the ways and means bill and
now in the technical paper and the implementation of the technical
improvements, the focus was to make it simpler, clearer and more efficient.
All those individual aspects of the technical changes have been developed in
response to submissions from municipalities, health care and charities.
Senator Angus: From the Canadian Medical Association?
Ms Stewart: From individual groups that wanted things clarified, changed and
tightened down. There is no conflict between the two departments on the
importance of getting this done.
Senator Angus: I am glad to hear that. It would be a bad image for the federal
government. We are all federalists here.
The chairman, as he has always done in the spirit of cooperation, has undertaken
to be sure that you are made aware of some of the evidence that will be brought
before this committee as we go to the same three provinces upon which you are
visiting this horrendous thing.
Given that it appears that it will happen, some witnesses have said, "We
agree with the former Conservative government and with the present government
that a national sales tax that is harmonized is desirable and good and will
lead to the creation of jobs." However, because of the way this one is
happening, the fragmentation of the marketplace and the resulting administrative
problems, they are hoping -- that is, with the milk of human kindness that you
advocate so eloquently -- that you will go easy on the enforcement and not rush
too fast. It will be your intention to ensure a kindly approach to this
Ms Stewart: Yes, always. Your comments are interesting. There are many things to
which I could respond.
In response to the issue of enforcement, from my department's point of view,
when we talk about compliance, we look at encouraging compliance in three ways:
First, through education, making sure people understand what the requirements
and responsibilities are in terms of compliance; second, in terms of making
things simpler and continuously improving the simplification of tax
requirements and the compliance requirements of our various regimes; and, third,
Honourable senators might be interested to know that, generally speaking, in
Canada, we have 95 per cent compliance with our tax regimes. This is partly due
to the approach that we take, which is one of self-assessment. We say to
Canadians, "You know what the rules are, pay your taxes." We will have
an audit program afterwards to ensure things are as they should be, but we
trust Canadians and it is a democratic approach.
In this particular instance, we want to spend time making sure that businesses
and consumers understand their responsibilities under the compliance aspects of
the new harmonized sales tax. There will definitely be an enforcement component
to it. It really builds on the enforcement strategy that we have in this place
and is quite successful. We have been working in partnership with the provinces
for some time.
By August, we will be prepared to have full enforcement methodologies in place.
Our interest at this point is continuing with our tradition, which is to
encourage a full understanding, an understanding that Canadians comply with
legislation as it is passed, and making sure that everyone understands their
Senator Angus: I subscribe largely to what you are saying about the law-abiding
nature of Canadian people.
However, as is agreed to by some of the officials, there is a complex nature to
certain portions of this proposed legislation. Hopefully, there will be a
working-in period. I hope you will be gentle.
Ms Stewart: We will look at every circumstances on an individual, case-by-case
basis. Beyond that, we have made considerable effort and taken measures to get
the technical papers out there so that people have had time to understand,
digest and comment. It is important to ensure that we have the circulars out so
that businesses and individuals know what is coming.
We have the monthly GST report that continues to update users on the particular
aspects, changes and improvements of the system. We are using the Internet and
all kinds of new technology to share and communicate the requirements of the
government. Your point is well taken, but it is significantly a part of the
focus of my department. You can rest assured that we will continue in that vein.
Senator Angus: I hope you will continue your efforts to bring you onside with
the other provinces.
Ms Stewart: If you can do anything to help us, we would be pleased to have your
Senator Kenny: Opponents of the bill say that it is divisive and harmful for
national unity. What do you say to that?
Ms Stewart: We are building towards a comprehensive consumption tax system that
will work. Presently, we have a system that is not working as effectively or
efficiently as it should be. We have a multi-level tax at the federal level and
retail sales taxes at the provincial levels.
As I mentioned in my opening remarks, we are currently finding that with the
federal and provincial governments saying, "Look, we can do this better
together," the notion of a single taxpayer and single tax collector makes
I view this initiative as quite the opposite, namely, as an indication that the
federal and provincial governments are working more strategically together and
more in the interests of all Canadians as opposed to a parochial strategy.
Senator Kenny: Yesterday, we heard representatives from the tourist industry.
They talked about tourists coming to Canada, purchasing goods in Canada and
taking them with them out of the country. On the way out, there is a mechanism
made available to them by which they would get a rebate on the taxes paid. The
representatives of the tourist industry suggested that there might a better way
to give them that rebate. In fact, they suggested that if it happens at the
airport or the border, or sometime later by mail, the tourist does not get a
chance to spend the money inside our country. Are you or the department
contemplating ways to provide for the rebate of the harmonized tax in the
country so that these tourists who are bringing their dollars or other
currencies here can leave more of them behind?
Ms Stewart: If I am not mistaken, last year we paid back $69 in visitor rebates.
In the technical papers, if I am not mistaken, we have expanded the use of those
rebates to include businesses so as to encourage foreign businesses to come to
Canada and take advantage of our convention venues. You will recall that in the
last budget it was recognized that we need to review the whole visitor rebate
package. We will be undertaking in my department a complete review. We will be
working with the Canadian tourism commission and individual tourist operators to
find the strategy that works best, recognizing that we have a fiscal
responsibility. We have multiple interests with which we have to deal. We have
to find the strategy which, for the most part, services all our needs.
Senator St. Germain: Thank you, minister, for appearing with your officials
Like Senator Angus, I believe that the rest of Canada had to pay $1 billion
because of this statement:
Yes, I will abolish it, but I need the money. It is taking $15 billion and I
will have to collect another $15 billion. So you go and sit and in a very
civilized way and say to the provinces that the poor small businesses have
items with federal tax, other items with provincial tax, or both, or sometimes
none. So we have to clean up that mess and produce $15 billion.
Those were the words of the Prime Minister as broadcast on CFRB on August 26. It
is the same Prime Minister who said he would reduce unemployment.
You are saying that you have harmonized the tax and that in four years the
revenues will be generated. Your prognosis is that it will offset the cuts they
are making now to their provincial tax by harmonizing.
How can we rely on that? What will happen to Newfoundland, which has cut its
taxes by 4 per cent or 5 per cent, to harmonize this? We have taken $1 billion
from the rest of Canada to subsidize this initiative to meet up with the
promises that you say are in the Red Book and I say are as a result of the CFRB
How can the people of eastern Canada be guaranteed that the revenues will be
generated; and that the rest of Canada will not be called upon to pony up more
money in the event that the reduced tax does not generate the jobs and the
dollars as you predicted in your opening remarks?
Ms Stewart: Senator, we all have to agree that Canadians were totally frustrated
with the GST as it existed. Clearly, something had to be done to fix the darn
thing. We made a commitment to replace it and to collect at least $18 billion.
Senator St. Germain: You made a commitment to abolish it.
Ms Stewart: We have worked diligently on that with a full review, and I think
the best solution in response to the needs of Canadians. That is the going-in
When you talk about the agreement with the Atlantic provinces, I go back to my
comments about our experience with any significant structural change, and there
have been many in the last three years which have led to more efficient
government and a different way to operate our economy. Many of these programs
were in Western Canada. Some were in Eastern Canada and some in Central Canada.
A strategy of our government has been to get things to work, to move toward
solutions, solutions that you were unable to acquire, particularly if we are
talking about the GST.
Senator St. Germain: Do you think we did not have the same intentions?
Ms Stewart: The agreement that we have struck with the Atlantic provinces is
based on a formula which exists for any other province which chooses to come on
board. It is not something that is solely available to three provinces in
Atlantic Canada. Prince Edward Island, Manitoba and Saskatchewan are also
eligible for a similar arrangement because we believe that moving to the
harmonized sales tax system is critically important to the strength and the
future of our economy.
If you ask me how do I know that the generation of revenues will come, well, I
look to third party information. I look to the Canadian Institute of Chartered
Accountants who say, "You have to understand that the way we have our
sales tax system working now costs Canadian businesses between $400 million and
$700 million per year just to comply with it." That is crazy; it is nuts.
We have to fix it.
I stated the numbers which were prepared by the economic council of the Atlantic
provinces. They see increased consumer activity to the tune of $120 million per
Canada is a trading nation. It always has been and it always will be. If we can
be more competitive as we trade our very valuable goods and services across our
borders, then there will be an improvement.
Providing governance that in itself gives a competitive advantage to the economy
is becoming a hallmark of our government. Recognizing that government can
either participate and assist or stand in the way is something we understand
very clearly. Our commitment is toward the former, to help build the
partnerships we need so we can have the strongest economy we possibly can
through the 1990s and into the 21st century.
Senator St. Germain: I respect your intentions fully. I believe you thoroughly
when you say your intentions are right. Your intentions were to reduce
unemployment in this country, with the infrastructure program and other
programs. It did not work. You were going to scrap the free trade agreement
and, fortunately, you did not.
My other question relates to the Canadian Medical Association. Representatives
of the medical association who appeared before us told us that doctors
operating out of private offices are not eligible for input tax credits for the
purchase of their equipment. They cannot recover those costs because they are
paid by the provinces for their medical services. Do you not think this is
unfair to this particular profession, members of which are under considerable
strain as a result of your cuts in transfer payments to the provinces for
medical, health, hospital and educational issues? They are under the gun.
This is a tough business, minister. You are doing a good job as an individual in
answering these questions. However, I must put the question to you because it
has been put to me by doctors from right across this country. I received a
comprehensive submission from the head of the association of physicians and
surgeons in B.C.
Would you comment, please?
Ms Stewart: If you want to look at the unemployment numbers, they have come
down. We looked at years of Tory governance and saw that in every year of that
governance the unemployment rates went up. They are not coming down quickly
enough. Let us agree that at least the trend is in the opposite direction under
If we want to talk about transfer payments, we can go to the depths of that as
well and understand what the percentage of actual revenues that are being
collected by the provinces are vis-à-vis the reduction in transfers.
There is an interesting story there as well.
We should get to the question that you pose, which is that of doctors and the
circumstances under which they participate in the GST and the harmonized sales
tax in the Atlantic provinces.
I remind you that we are continuing with the same base as was implemented at the
outset of the GST; the base where health care services were not taxable. There
is no tax collected on health care services. That was part of the decision you
made and part of the decision that we believe is important.
We realize that physicians have always paid sales tax. They paid the FST and the
provincial sales tax. There is nothing in this bill that changes anything vis-à-vis
what was already in place and implemented under the GST. We understand that.
Senator St. Germain: I am not sure that is exactly the case.
Ms Stewart: There have been no IPCs available for doctors through the whole
piece of the GST, of which I am aware.
I have every admiration for our doctors and the job they are doing. However, we
understand that the provinces allow them to reduce their income taxes by the
sales tax paid. It is a legitimate business expense. I have seen reports from
the CMA and I have been lobbied by my own doctors. They use the number of $4.7
million as the loss in the Atlantic provinces, but I am not sure that they
include the income tax reduction of about 50 per cent that they get as a result
of that, so I am not sure that is a completely fair number. It may be about
half that. We will have to check that out.
Beyond that, the logic of the GST system is that you collect it and then you are
eligible for input tax credits. It is not collected on health service. It is
not collected on medical services or dental services. There are many
professions implicated here.
If we were to move to zero rating on these services, that would result in a
revenue loss for all health care services of about $350 million. That is a lot
To whom do you give the tax benefits? We collect a lot of money and we do not
tax it. As you point out, the doctors have relationships with the provinces. It
is the provinces that set the remuneration. If that is an issue, it is my
judgment that the discussions are best had with the provinces in this regard.
Senator St. Germain: There is no question that it is an issue. I do not believe
the playing field is level.
Senator Kenny spoke of the divisiveness of the way the government is proceeding.
We appear to have given ammunition to the Bloc Québécois in their
pursuit of opposing anything that appears to be good for any part of Canada
other than their own back yard, and I am not sure whether they are doing any
good for their own back yard.
The province of Quebec says that they are due $2 billion for having harmonized
their tax, based on the actions that you have taken with the three Atlantic
provinces. How was that benchmark set? Do you think it is fair that Atlantic
Canada should receive this remuneration but not Quebec? Do you not feel that
this is divisive? Of all the things that are important in this country, I
believe that maintaining a united Canada far exceeds anything.
Ms Stewart: Whenever we talk about taxation, it becomes a political event, no
matter which province you are talking about. Taxes are one of those visceral
things that are tough to deal with. You have experienced it, as have we all.
In setting the formula, we had to determine the appropriate level. We can
accommodate some losses in revenues. In order to move ahead, we will partner to
do so until the economic advantages kick in. The 5-per-cent figure seemed to be
an appropriate level.
It is not only Nova Scotia, New Brunswick and Newfoundland that had the
opportunity to participate in this formula. Any province that stood to lose
more than 5 per cent of its revenues could have participated. That is the
standard and it applies to everyone. It is not different for any province. That
is the decision that was made and the formula that was offered. That is what we
have costed the program on.
I hope that level heads prevail and the logic and reality of that issue is
understood. We are all politicians and everyone looks for a sound byte.
Senator Stewart: I wish to follow up on Senator St. Germain's question with
regard to physicians in private practice. The representatives of the Canadian
Medical Association made a very effective presentation here this morning. I
understand now from the minister that, in the case of physicians, the provinces
provide some income tax reduction to offset the GST and, under the new
arrangement, the HST.
Is that a correct understanding of the situation?
Ms Stewart: That is my understanding, but I will defer to Ms Dantzer from the
Department of Finance who can speak about the technical aspects of the tax
Senator Stewart: That would be helpful because the representatives made a
convincing case this morning and I would like to hear the other side.
Ms Ruth Dantzer, Director, Sales Tax Division, Tax Policy Branch, Department of
Finance: Retail taxes paid, as well as GST paid, is a legitimate business
expense which is taken off net income before people pay income tax. In effect,
it is at least at the higher marginal rates and you are getting at least a
50-per-cent advantage. Therefore, if you are paying $1 in tax, the effect to you
on your net income would be 50 cents, at the low end. In Newfoundland and
Labrador, basic federal tax is more like 69 per cent. Therefore, they are
paying nowhere close to the full impact of those taxes on their net income.
Senator Stewart: It would be useful if we could get actual figures on this for
the three provinces. We will not ask for them now, but they could presumably be
The Chairman: We asked the same question of the Canadian Medical Association
this morning. It would be even more helpful if we could get a common set of
Senator Stewart: In addition to the representatives of the Canadian Medical
Association, we heard this morning from Mr. Glen Pye of the Alliance of
Manufacturers and Exporters of Canada. I marked two points in his brief. One of
those relates to the preparation that is being made to assure smooth transition
-- to use your term, minister -- to the new tax regime. It states:
... our members remain concerned by the lack of HST guidance provided by Revenue
Canada to date. It is essential that a comprehensive taxpayer education program
be initiated immediately to provide the information and advice that is a
necessary prerequisite for taxpayer compliance.
What have you done to meet that implied criticism?
Ms Stewart: A number of things have been done, and more will be done. First, we
were anxious to get the technical paper out early. That was done in September
for feedback. That was a point when interested parties and implicated parties
got information about what to expect and how the changes would potentially be
Beyond that, Mr. Baker can comment on the circulars and the timing of the
circulars send out to existing GST registrants.
Mr. Bill Baker, Staff, Department of National Revenue: The department has taken
a full range of measures to identify the necessary information and provide it
to registrants. Timing of the provision of this information is very important.
To have provided a lot of information too soon while the requirements were
still based on the GST regime would be confusing for registrants.
We have timed our communication strategy to coincide with getting them ready for
their first set of requirements for filing under the new regime. That
communication strategy encompasses a broad array of vehicles, including
technical publications, fact sheets and issues of excise GST news. We are
holding business seminars. We are providing information on the Internet.
Shortly, we will also be providing some general mass media advertising in the
Atlantic region in particular to ensure that everyone is aware of their rights
and obligations under the new tax.
Ms Stewart: There is another advantage to us. In our agreements with the
provinces, we will have some provincial resources coming to work with us in the
implementation. Many of those resources will help us with the outreach and
education and with understanding the transition between the two taxes. We are
looking forward to having those employees with us, too.
Senator Stewart: I have a question relating to export producers in the
participating provinces. In Nova Scotia, for example, the overall reduction
which the HST introduces is 3.77 percentage points. The present combined tax,
with the provincial sales tax and the GST, amounts to 18.77 per cent. That will
drop to 15 per cent.
On the other hand, because of the wider base, producers and manufacturers who
will export will be paying a sales tax on a larger number of items. The base
will be wider. We understand that they can get a refund to the extent of the
We were told by Mr. Pye that Revenue Canada must recognize that businesses will
now carry an additional 8-per-cent tax on many of their inputs. As a result, it
is essential that Revenue Canada be fully prepared for HST implementation,
including ensuring that refunds are expeditiously processed.
I have not had much experience with your department, but in my experience on the
personal income tax side, it seems that business does not move very rapidly. If
I were an exporter and had money tied up in a refundable tax that had been
paid, I would be a little bit uneasy. What are you doing to improve your
Ms Stewart: We are doing several things. In reference to your own personal
circumstances, we have had a great improvement in our record in terms of
personal income tax refunds over the last number of years. If you e-file and
have a direct deposit to your account, we will have any refund owing to you in
your bank account in an average of nine days, compared to a few years ago when
it was three weeks or three months sometimes. We are using technology to
improve that turn-around.
The issue of cash flow for business is an important one. As you know, they pay
their tax and then complete their paper work. We make the input tax credits or
pay the tax credits. For businesses to have confidence in the turn-around of
that ITC system is critically important, and we take it very seriously.
We have a number of strategies in place that focus on that, including increased
service, increased levels of staffing. Mr. Burpee has responsibility for that
area of the department. I am glad to have him comment directly on our new
Mr. Mike Burpee, Assistant Deputy Minister, Department of National Revenue: To
start with, under the provisions of the act, interest will automatically kick
in after 21 days. Obviously, it is in our interest to turn around refunds in
less time than that. We do a lot of things to make sure we do that.
My advice to any business that wants to ensure they get the quickest possible
refunds is to take us up on filing their returns electronically, which they are
able to do, and allowing us to direct deposit their refunds or their credits.
That will significantly save them time because they are dealing electronically
rather than through the mail.
I do not have the figures in front of me, but I know that a few years ago, we
were completing well over 75 per cent of the refund claims within less than 20
days. That would have included people that were filing paper returns.
There are initiatives of which people can take advantage, particularly if they
want to work with us electronically, that will make their life better.
Senator Stewart: In non-controversial cases, the exporter should expect his
repayment within three weeks?
Mr. Burpee: He should. The advantage we have here is that we are dealing with
existing registrants. These are not new registrants. These people are known to
us through GST, so they already have a track record with us. Part of the way we
deal with refunds is to look at risk. If they are on a continuing credit basis
and we know that they are a good risk, then they go through the system that much
Senator Simard: Mr. Chairman, Bill C-70 before this committee is a cruel,
shameful, unfair, ill-conceived, pernicious, vile and fraudulent piece of
Last week, before it was adopted on second reading, I suggested that this bill
be buried with full honours, and I have not changed my position.
Madam Minister, you have told us that it is the intention of the Liberal Party
and of your government to improve, simplify and restructure the GST. We agree
that the tax needs to be restructured, simplified and improved, and I heard
Senator Kirby say that this bill was the end result of numerous consultations
that had taken place. He added that representations had been made to various
House of Commons and other committees, that 500 witnesses had been heard, that
700 briefs had been submitted, and that 20 or more options had been considered.
Moreover, he referred to these 20 options earlier. If this is the best you were
able to come up with, then I do not think you have anything to brag about!
I will concede that Liberal senators, no doubt inspired by your government, have
agreed to let this committee travel to Atlantic Canada and to hold hearings in
Ottawa. When we suggested last year that the committee travel and hear from the
unemployed and from workers in Atlantic Canada, I would remind you that Liberal
senators rejected this option on three occasions.
We will be content with examining this bill. I will be travelling with my
colleagues to New Brunswick on Monday and to St. John's, Newfoundland, if
possible on Tuesday, and then on to Halifax certainly on Thursday and Friday.
Today, I am inviting consumers and small and medium-sized businesses to come
and make their views known to us.
I will also take the opportunity during this trip to voice my opposition to this
bill. I will be doing that next week and I will be doing that in a month's time
if the bill has not been amended or defeated, which I am still hoping will
happen. Above all, during the upcoming election campaign, I will use every
opportunity to denounce this bill, for the same reasons.
I have a question for you and it will tell me if the government is really
attuned for once to the wishes of the people and of parliamentarians. It is the
same question that I put to my friend Senator Kirby last week.
Is this exercise which began yesterday and which will continue tomorrow and
perhaps next week in Atlantic Canada merely a charade? We are travelling to
this region to listen to residents, business people and the working poor,
either directly or through citizens' groups which will make representations to
us. Can the minister tell us today whether the government is serious in this
endeavour, since we are working to a deadline? I believe the magic deadline is
April 1. Is the government serious? Will it be possible to propose amendments
to this half-baked bill?
Ms Stewart: I have three things that I would like to say, Senator.
First, you cast great aspersion on the bill. That is your point of view, but I
would ask you to be specific if you want me to reply to what you say is
inappropriate about the bill. Quite frankly, as a result of great consultation,
we have identified over 100 different streamlining or simplification measures
that are part of this bill. We have responded broadly -- through the structural
changes towards harmonization, towards a single administration and towards
tax-included pricing -- to the concerns of Canadians.
We very rarely find consumers, businesses and government all benefiting. We find
it in this legislation. Consumers will be paying less tax, businesses will be
more competitive, and government will be more effective and streamlined and
working in partnership at different levels.
You mentioned that the Liberal senators were not at first supportive of going
into the Atlantic provinces to hear from Canadians. Quite frankly, that is
probably because they know the track record of the Finance Committee and the
House of Commons, and the energy and the time that went into the original
hearings on finding a replacement for the GST. We have crossed the country. We
have spent a great deal of time. We have listened intently and carefully. As a
result, I hope that Atlantic Canadians will feel that we have a piece of
legislation that responds to the needs of consumers, businesses and
Your point, which I take very seriously and with which I agree, is that at no
time do we have everything perfect. Nothing is static. Times change, people
change and circumstances change. The commitment that is required of us is that
there will be a continuous review and evolution of this system. We cannot move
forward unless we get the structure and the base right and unless we achieve
harmony and are making the first important steps in that regard with Bill C-70.
Senator Simard: I accept your invitation to give my reasons, but I should like
to return to the original commitment or election promise made by your
government and the present Prime Minister when he was in opposition.
I have not read the Red Book, but I have my suspicions about what is contained
in it. However, I remember vividly a statement on television. I heard the same
thing on the radio. I heard Jean Chrétien promise that the Liberals will
scrap the tax. You are far from scrapping the tax. You are keeping the tax in
seven provinces and territories, and you are making it worse for Atlantic
I will give you some reasons. First, as I see it, you are shifting the tax load
from corporations onto individual taxpayers, and especially onto the shoulders
of the working poor and people depending on government and other support.
You are broadening the base. I would like to give you an example.
The Chairman: Senator Simard, could I interrupt?
Senator Simard: I am only accepting the minister's invitation.
The Chairman: We said ten minutes. You have had ten minutes but I am happy to
give you the five minutes Senator Kenny did not use. We need to move on so that
other senators have a chance.
In fairness to Senator Simard, he was a provincial finance minister for nearly a
decade. Therefore, perhaps he understands these issues deeper than most of us
on the committee. He is entitled to ask another question. I am not objecting to
that. I was just pointing out that if the preamble is too long, he may not be
able to get an answer from the minister.
Senator Kenny: If he is using my five minutes, he must ask a question.
Senator Simard: I have said that this legislation in front of us will be
shifting the tax load from corporations to consumers -- that is, the little
guy. The government of Premier McKenna will be maintaining the hidden tax on
gas, for example, and they will be adding another 7 or 8 per cent on the
That will net the provincial government at least $75 million on this item. We
issued notice last fall to the people of New Brunswick that they will have new
or additional tax. Corporations have a knack and the tradition of passing
additional taxes along to consumers.
It is only apparent tax relief that we are getting now, short-term. I cannot get
To answer the question that I posed earlier, will you entertain, accept, receive
and consider suggestions for amendments?
Ms Stewart: I must respond to your comments about this being a transfer of
taxation because I do not agree with that interpretation.
First, the base upon which the HST is being developed is the same base that was
accepted by the Tories when they implemented the GST. You must remember that.
Senator Simard: The HST is wider in New Brunswick as provincial taxes apply.
Ms Stewart: It is matching the GST base that you accepted a few years ago.
Senator Simard: That is right.
Ms Stewart: Second, it is clear to us that consumers will pay less for their
goods. As businesses receive their input tax credits, they pass those savings
along in the price of the goods. There will be not only a reduction in taxes
for the majority of the goods in the Atlantic provinces but also the cost of
the good itself will be less because we will not be paying tax upon tax. That
imbedded tax will not exist.
Third, as part of the structure, we have a system of rebates that specifically
targets low-income Canadians. That regime will continue from the federal point
of view and is certainly there for the provinces to review and potentially
implement, maybe even more strategically because they are closer to the people
in their provinces and understand where the particular heartache, if there is
any, may occur.
I must set the record straight. There are a number of initiatives that indicate
that your assertion that there is a transfer here is not clear and appropriate.
Senator Simard: Will you answer my question? Why are we continuing to spend good
money and conducting hearings in Atlantic Canada if the government has made up
its mind that it will not accept any amendments?
Ms Stewart: We have great respect for the parliamentary system. You are part of
Senator Simard: Answer my question, minister.
Senator Kenny: Give her a chance!
Ms Stewart: I invite to you come forward and speak to issues that were neglected
or failed to be reviewed fully by the Finance Committee. I have great respect
for the process and the work that you do <#0107> that is, if the
amendments are borne out and are indicative of things that we have overlooked.
Senator Simard: Will you delay the implementation until April 1?
Ms Stewart: We want to get it ready.
Senator Lynch-Staunton: One of the many problems I have with this bill -- and
they are concerns shared by many -- is that if it is implemented as presently
written, we will be sanctioning three different national sales tax policies in
this country: One applying to three maritime provinces; one applying to Quebec;
and one applying to six other provinces. I do not think that that is our
definition of "harmonization". It will cause more problems,
aggravation and costs than a national tax scheme would have.
We know why it is being done, namely, to satisfy some political embarrassment
rather than to focus on harmonization as it should be.
As you discuss harmonization with the other provinces, is it your intention that
one of the main conditions for a harmonized sales tax in the six provinces is
that the HST must be at 15 per cent?
Ms Stewart: First, we have come down from 10 different sales tax regimes to
seven; and, second, we are committed to having a single, harmonized structure.
We are going in the right direction.
As I mentioned earlier, often when we make significant changes like this,
approaching it where we have the energy and willingness to combine makes sense.
The Canada Health Act was not implemented overnight with everyone on side.
However, as the value and the goodness became apparent, different provinces
came together. We are committed to this because it makes sense.
As far as the appropriate rate for the harmonized sales tax, the calculation for
support in terms of harmonization is offered at the 7- or 8-per-cent level. As
we look at this, we are committed to getting people into the system.
From our point of view, having a common base becomes the first step. Getting a
rate that is as close as possible across the country is very important. Whether
it is at 14, 15, or even variable beyond that, if we can at least get ourselves
taxing at the same base, we are getting closer to harmonization and we can then
deal with the other aspects as they come forward.
Senator Lynch-Staunton: We could then envision another harmonization agreement
with, say, three western provinces, which would differ somewhat from the one in
the maritime provinces?
Ms Stewart: Yes.
Senator Lynch-Staunton: That is actually one of the clauses in the agreement.
There does not seem to be much energy being spent on trying to get a national
scheme. Effort is being spent on any scheme, no matter how one may vary from
the others, which I do not find meets the definition of "harmonization"
as we saw it.
Also in the agreement between the three provinces and the Canadian government,
there is a provision that no province may increase its share of the HST without
the approval of a majority of the participating provinces. There are
limitations on how a province may alter its portion of the HST. I understand
that because if you are to have harmonization, you must work together in harmony
and not break away for whatever reason without general approval.
I will not get into the argument about whether a province is giving up something
which is protected in the Constitution; that will be for others to discuss,
although it is a concern.
Is there anything in the agreement which stops a province, despite having signed
on, from imposing a separate provincial sales tax? Let us say province "X"
wanted to alter or increase beyond what is permitted in the agreement its
portion of the HST and was refused or could not do it? What is to stop it from
then imposing a separate provincial sales tax to make up for what it was not
allowed under the agreement?
Ms Stewart: First, let me return to the issue of the harmonized structure. Not
only is rate important but also base and rules are important. We will have a
common base and a common set of rules which significantly streamlines and
simplifies the tax structure. Moving towards a common rate is important, but
not as important as having the rules and the base connected.
With regard to your question about the ability for a province to then re-enter
the sales tax field at the single level rate, in terms of the MOUs, Ms Dantzer,
what are the restrictions there?
Ms Dantzer: There are no restrictions in the MOU. If you look to any one of
those threes provinces, they have made the decision to move many levies. They
have their entertainment and specific taxes and move it into one.
The flexibility for the province to introduce new levies exists but, in signing
this agreement, for simplicity, they have made the decision to collapse it into
Senator Lynch-Staunton: I appreciate that, and for $961 million I would probably
be in favour of this sort of harmony as well.
On the other hand, there are restrictions here that handicap a province which,
for whatever emergency reason, felt that it would have to impose an additional
sales tax for one year.
Ms Dantzer: It can still do this. Its constitutional right to impose a direct
tax has not been affected by this memorandum.
Senator Simard: The involvement of these provinces amounts to an abdication of
Senator Kenny: Voluntarily.
Ms Stewart: Everyone has answers to this. One of the biggest and most important
answers is the fact that, as we move into this new relationship, we have a
genuine commitment to work together positively. We are creating a liaison
committee which does have a significant force of influence, and we recognize
that there must be a opportunity for full debate and involvement and a
partnership as we move forward in this particular field.
Perhaps Ms Dantzer could give the example of the levy that now exists in terms
of used cars. They developed it on their own, and they must administer it on
their own. No one stops a province from doing that.
Senator Lynch-Staunton: I think I have the answer to my question. Legally, the
provinces can go beyond this harmonization scheme if they unilaterally want to
impose a separate tax.
Ms Stewart: Yes. The cost of that, of course, will be considerable.
Senator Lynch-Staunton: I am not suggesting that they will do it. I do not see
any purpose in it, but they have not lost the right to do that.
Ms Dantzer: Constitutionally, they have the right.
Senator Lynch-Staunton: You talk about harmonization with Quebec, but it is not
really harmonization because the two taxes are separate. The collection agency
is the same. Quebec can do anything it wants with its tax, and has since
harmonization came in. When we talk about "harmonization," we are
using the same word to mean different things.
On books, as I understand it, a full rebate now will be afforded educational
institutions. A full rebate will be afforded, amongst others, libraries and
educational institutions for the purchase of books for their own purpose, is
Ms Stewart: Yes, and also used by their clients.
Senator Lynch-Staunton: Used by their clients and given to their students?
Ms Stewart: Given to them, yes.
Senator Lynch-Staunton: Yes, but not sold to their students.
Ms Stewart: That is right. Book stores do not have the facility.
Senator Lynch-Staunton: Why is it that when a student is given a book, the giver
does not have to pay the GST, or what will become the HST in some parts, but if
a student buys the same book, the GST is imposed?
Ms Stewart: One of the important measures we must consider is fairness.
Providing a different circumstance, for example, for a university book store
versus a book store that is operating three blocks away would not be an
Senator Lynch-Staunton: I will stay in the same university book store. My
understanding is that a student buying in his book store will pay the sales tax
if he buys a book, but if he is given it by the university -- and, it will come
out of the same shelf in the same book store -- then the university gets a
Ms Stewart: Is there a university that gives its student its books?
Senator Lynch-Staunton: That is not the question. If you want to get on that
one, in the secondary and primary levels in Quebec, amongst other provinces,
books are given to students. Today, in La Presse, it was pointed out by the Fédération
des comités de parents, that students are being asked:
... des écoles demandent aux parents des frais pour l'achat de
dictionnaires ... et de grammaires ...
What was given before by the school board to the students, namely, the
dictionaries and the grammar books, must now be bought by the parents. Under
the exemption, the school boards do not have to pay the GST in Quebec, but now
that the parents have to buy the books for the students, they will have to pay
the GST. It is the same book for the same purpose, but because it has a
different purchaser, it may or may not have GST on it. Why is there this fine
Ms Stewart: You are right. We will have that with other things. It may be the
same book that is sold in a book store or a university book store and the GST
can be paid the same --
Senator Lynch-Staunton: No, I am limiting this to the students, the same
customer who benefits from the book. Depending its source, the tax may or may
not be imposed.
Ms Stewart: As the circumstances sit now, you are right. There is 100-per-cent
rebate to educational institutions, libraries and other institutions providing
book reading services. If they choose to sell books, that will be their choice.
Senator Lynch-Staunton: That is not the question. Let me try once more. The
question is: Why is it that when a student is given a book from his or her book
store or from his or her school board, the library or the university or the
school board is exempt from the tax and gets a rebate, but when that same
student must purchase the same book for the same purpose from the same library
or the same school board, the tax must be paid?
Ms Stewart: It is an individual circumstance. Different school boards offer
different services and make different sales.
Senator Lynch-Staunton: I am asking why the government made this decision. I am
not asking why the school boards give or do not give or sell or do not sell. I
am asking why the government makes a distinction.
Ms Stewart: Our intention was to provide as much support for the issue of
literacy as possible. It is not an issue of general reading material but of how
we impact and hopefully improve literacy in this country. Our strategy was to
be very targeted and to provide 100-per-cent rebate to those particular
institutions that we believe are on the front line and then, more specifically,
as you will see in this budget, to provide money directed to literacy. How the
institutions choose to utilize that will be up to them. As in every other
circumstance, as we develop on this and see the practice and the development of
implementation or common usage, we will review it, continue to regard it, and
see what the implications are for the broader community.
Senator Lynch-Staunton: I do not see any connection between a university student
buying a book and the program of literacy, which we all support. I do not see
any relationship between the two. I am trying to find the logic behind the same
product being used by the same person purchased or given from the same source
being subjected or not subjected to tax, depending upon the circumstances. It
would seem to me that exemptions should apply in both cases or the tax should
apply in both cases.
Ms Stewart: Our interpretation at this point was to provide services to those
first-line institutions that we feel are supporting education and improved
literacy, for one aspect, for Canadians. That was the strategic design of the
If I am misinterpreting your question or not understanding it, perhaps someone
else on the panel would like to respond to the interpretation that you are
Ms Dantzer: The bill presently gives consistent treatment. The students will not
be charged tax on any book that is provided by that school board; the students
will have to pay the GST on any book that the school board decides to sell to
Perhaps some of those students may already have dictionaries and grammar books.
To that extent, the school boards do not want to spend their budget, whatever
it is, giving books to students that they may not need. They have put the onus
back onto the student in terms of probably a cost-saving measure. I am guessing
here, because every school board will make that decision in terms of whether
they want to provide grammar and dictionary books or whether they decide to
spend that extra $100 on books for the library. That is not a decision we try
to anticipate in terms of the legislation. That decision is up to the school
board when they set the priorities for the information and the materials that
their students need.
Senator Hervieux-Payette: As you undoubtedly know, minister, when the budget was
tabled, Quebec's Minister of Finance pointed out that Quebec would likely incur
losses of $1.9 billion with the introduction of the new harmonized sales tax.
Can you give us an overview of the situation and explain to us in particular
the reason why the 5 per cent rule does not apply? I think it is important for
the Minister of Revenue to explain clearly for the benefit of Quebeckers that
Quebec has not been deprived of $1.9 billion in revenues and that there have
been no losses for Quebec. You are better qualified than I am to explain this.
Ms Stewart: As I said earlier, the formula that has been offered to all the
provinces is the same. There is no differentiation, tweaking or changing. In
terms of the 5-per-cent loss of revenues that should or could happen as a
result of harmonization and moving to a different base, the formula is
identical. When the analysis was made of the circumstances that were under way
in Quebec at the time of the harmonization, the indications and the data bear
out the fact that there were not 5 per cent of the revenues lost in the
province of Quebec as there will be in the three Atlantic provinces and, should
they be interested in participating, in Prince Edward Island, Manitoba and
Canadians need to understand that there has been no special or differentiating
treatment. The same formula has been applied to the same kind of base and the
decision has been made in the same manner.
Senator Hervieux-Payette: For the sake of clarification, have you received a
formal request for a rebate from the Quebec government? Much has been written
about this in the press. Politicians speak to one another through the media.
Has a formal request been received and if so, pursuant to which principle of
the agreement signed with Quebec?
Ms Stewart: I understand that the Minister of Finance received an official
request from the Finance Minister in the province of Quebec. They have met.
Details have been exchanged. It has been pointed out clearly that under the
formula there would have not have been a reduction of 5 per cent. The message
has gone back quite clearly that under the formula that has been provided to all
provinces, Quebec is not eligible, just as Ontario, British Columbia and
Alberta would not be eligible.
Senator St. Germain: Has Quebec experienced any losses?
Senator Hervieux-Payette: I asked the Finance Department yesterday to supply us
with tables showing the revenue collected before and after harmonization with
Quebec up until the present day. Like you, I am waiting to see these figures.
We are supposed to receive an official document from the Finance Department. Do
you have these figures with you?
Ms Stewart: You made that request yesterday for that information. I can table it
for you now.
It states that prior to harmonization in 1989-90, the revenues were $5.1
billion. In 1990-91, they were $5.3 billion; and in 1991-92, which is the date
of harmonization, they were $6.1 billion. In 1992-93, they were $6 billion. In
1993-94, they amounted to $5.5 billion. In 1994-95, they were $5.4 billion; and
in 1995-96, they were $5.6 billion.
The source of this information is the Public Accounts of Canada. I will table
this information with the committee.
Senator Hervieux-Payette: I want to be certain that I understand this issue
fully, because I have a special mission where Quebec is concerned given the
controversy that surrounds this issue and the fact that the new harmonization
policy is not yet in effect.
I agree with my colleague Senator Lynch-Staunton. Partial harmonization has been
achieved in Quebec, while in the maritimes, much broader harmonization is being
sought. The national associations would like to see a single formula for all of
Canada and I agree with them. Quebec is the exception.
Concerning the administration of this tax, we were told that in the case of the
maritimes, there was no charge for collecting the tax and that the amount of
the tax was remitted. My understanding is that in Quebec, charges are imputed
to the federal government and that the previous government had negotiated in
the agreement the annual payment of an administrative charge for collecting the
federal GST. Do you have any figures to share with me?
Ms Stewart: You are right. In the circumstances as they will be with the
Atlantic provinces, Revenue Canada will be the sole administrator. We have
great partnerships and liaison committees. We will be working effectively with
the provinces. We will be the collector and there will not be a charge to the
provinces for that collection.
In our agreement with the province of Quebec, their choice is to do the
collection themselves. Yes, we have agreements with Quebec in terms of how much
we will remunerate the province for collecting the GST on our behalf.
We can table the figures. The total contributions amount to approximately $90
million per year. I have details here for the other years. In 1995-96, we paid
almost $92 million to the province of Quebec to collect the GST.
Senator Lynch-Staunton: What was the estimate at the time that you would be
paying this year? At the time of the GST the figure thrown around was about $20
million to $30 million. Since then, Quebec has said it has hired 1,400
additional personnel to process the tax. I assume that the cost of doing this
is way beyond the original estimates. It is shared on a 50/50 basis, is it not?
Mr. Davis: The means by which we compensate Quebec are based on the average
costs of administering the GST in the rest of the country. That establishes a
ceiling. The billings we receive from the province of Quebec must be within
that ceiling. There are variations year over year. It could depend upon the
ceiling or upon the level of billing that we receive from Revenue Quebec.
Senator Hervieux-Payette: It was mentioned that one potential impediment to
harmonization was the belief on the part of certain finance ministers that
harmonization could result in the virtual transfer of their power to collect
the sales tax. Even though provision was made in the agreement to allow the
provinces to terminate the agreement on six months' notice, to all intents and
purposes, too many restrictions were placed on them. As a result, some refused
to sign the agreement. With respect to your current negotiations, do you
believe that this consideration is the chief impediment or are there additional
obstacles to harmonization?
Ms Stewart: What we have been able to develop in our agreement with the Atlantic
provinces are very effective and quite creative governing bodies both in the
area of policy and administration.
As I pointed out, these are the beginnings of a very positive and new
relationship between the federal and provincial governments. It is an
indication of a new way of Canada building its federation and working
When we consider in particular the area of administration and the duplication
that can occur, for us to be able to join forces and have a single
administration allows for moneys that otherwise would have been spent on
non-program activities to go to Canadians in terms of programming and actual
As we continue down the road after implementation -- sooner rather than later, I
trust -- the success of those partnerships will be critically important to the
success of this initiative. We believe that we can make these new and creative
joint bodies work very effectively so that the provinces do have a say in the
administration and development of the harmonized sales tax in their particular
Senator Hervieux-Payette: Since the deputy minister will not be coming back, I
have a final question. In the course of your discussions with other European
Community countries that have harmonized their sales tax or VATs -- this is one
of the common market's concerns -- has it been your impression that these
countries feel it is important to have a uniform tax to promote competition and
in particular to stimulate the economy and consumption?
Ms Stewart: Absolutely. I was in Europe the first week of January and met with
the commissioner who is responsible for the value-added tax for the European
We are the only two jurisdictions in the world that are looking at streamlining
sales tax. They are looking closely at the activities we are undertaking here,
recognizing that, for the same competitive advantage, they need to have a
single value-added tax. We have built that bridge and will continue to share
information because the differences are not all that great.
Senator Buchanan: You are very knowledgeable, articulate and persuasive, but you
have not yet persuaded me.
Senators Angus, St. Germain and Simard have covered the $1 billion cost, the
administrative confusion, the problems with retailers, the GST background and
the reasons for the rush in getting this done, so I will not get involved in
any of that. I want to discuss with you the basic grassroots.
You said that consumer prices will go down, and I believe that is true in some
instances. For many years, my interest has been in people in the low-,
low-middle and middle-income brackets -- that is, senior citizens, tenants, and
so on -- who, in my opinion, will be hurt by the HST.
In our small province of Nova Scotia, our economy is not that bad. It is better
than the economy of New Brunswick, and has been for many years. In Nova Scotia,
for those income brackets that I just mentioned, power bills will go up. That
has always been a big problem in Nova Scotia, New Brunswick, P.E.I. and
Newfoundland. If this bill proceeds by April 1, we will have another increase
in power bills in Nova Scotia. We will have an increase in gas at the pump to as
high as 64 cents a litre, depending upon where you are in the province. The
price of home heating fuels will increase on April 1, as will the price of
clothing under $100 and some children's clothing. As well, the price of stamps
A fellow called me up the other night and asked whether the price of stamps
would increase on April 1. I said that if we could do something to prevent
that, we would. In 1996, a book of stamps cost $4.50 plus 7 per cent tax. If
this bill is passed, after April 1 stamps in Nova Scotia will cost $4.50 plus 15
per cent tax. In the other provinces of Canada, the price will remain at the
This fellow said that he would get a friend in P.E.I., where they had enough
sense to keep out of this GST -- under a Liberal government, by the way -- to
buy 100 books of stamps and send them to him.
All of the costs that I mentioned will be loaded on to landlords, who have
already said that they will not absorb the cost. They will pass that on to the
tenants as an increase in rent for low-, low-middle and middle income families
Are you concerned that all the items I mentioned will hurt low-income,
low-middle-income and middle-income families?
Ms Stewart: I am as concerned as you are about how Canadians manage to keep
themselves together over the course of what is probably the most significant
economic structural change in world history that our generation has ever
With regard to this particular tax, though, I again remind you that we are
harmonizing to a base that is, with some exceptions -- and more now with the
100 changes -- identical to the base that the Tories approved with the
implementation of the tax.
Senator Buchanan: That is political. Let us forget that.
Ms Stewart: It is the same base, senator, and you were there for it. Let us be
Beyond that, in looking at the impact, we can identify services and items that
will have the additional provincial sales tax added to them. We can identify
probably more that will have a reduced level of taxes.
Senator Buchanan: Like what?
Ms Stewart: Sweaters, computers, air conditioners, pencils and furniture. The
list goes on and on, as you know.
Senator Buchanan: Yes, including freezers and refrigerators.
Ms Stewart: Big things and little things; toothbrushes and potato chips.
I believe it is inappropriate to pick and choose your aspects. One of the most
important things we must remember with the harmonized sales tax is that, like
the GST that will continue to exist in the non-harmonized provinces, we have a
comprehensive system of rebates which is very much a part of and extremely
important to this kind of tax; a consumption tax that taxes everyone at the same
rate and does go toward making it progressive.
We have good experience with that rebate. We can target it. We can set the
income levels at which it can be used. As the provinces move toward this, and
as they look at their own personal experiences, they can utilize these kinds of
structures such as the value of a rebate, if they choose to do so.
I am concerned, as you are, about the welfare of all Canadians and the fairness
of the system to all Canadians, but we do have measures in place.
Senator Buchanan: A few minutes ago you talked about helping the municipalities
in their administration of taxes. I should like you talk to Mayor Walter
Fitzgerald of Halifax and ask him what he thinks of the municipal position on
HST. Halifax and all the other municipalities paid GST, got their 50-per-cent
rebate, and now will pay an additional 8 per cent and get 50 per cent of that. I
am told that their shortfall will be in the range of $10 million to $12
million. They can get that back by increasing taxes at the municipal level or
by cutting services. Are these mayors wrong?
Ms Stewart: We have made changes in the technical, streamlining section that
speak directly to some of the concerns of municipalities with the clarity of
the rebate system at the federal level. They are very happy with those changes.
The details are many. You are not interested in them at this point but they
have spoken directly to the concerns of the municipalities.
What you are speaking about is exactly what I was referring to in my response to
the first question. We have a system at the federal level of rebates to
low-income individuals, to municipalities and hospitals, the MUSH sector as we
have come to know it.
Senator Buchanan: I have already mentioned that, though.
Ms Stewart: There is nothing that stops the province from extending that kind of
rebate through its portion of the tax.
Senator Buchanan: Have you persuaded the three premiers, particularly the
premier of Nova Scotia, to do that?
Ms Stewart: That will be up to the mayor to whom you referred, in the city of
Halifax. Any rebate that they choose to implement, we will administer for them.
Senator Buchanan: Have they told you that they are prepared to do these rebates?
Ms Stewart: Those are the discussions they will have with the local
Senator Buchanan: I want to mention one other thing about the doctors, who are
pretty important people in Nova Scotia.
Ms Stewart: Absolutely.
Senator Buchanan: It is my understanding that the incremental increased cost to
doctors -- forget the GST for a minute -- because of the new 8 per cent which
they will absorb themselves, amounts to $4.7 million. That does not concern the
income tax deductions to which every business across the board has a right,
including doctors. They have no way to absorb that 8 per cent. They cannot pass
it on to their patients at all. They must absorb it. Is that not right?
Ms Stewart: When we were talking about that earlier, we were talking about all
health care services. A decision was made at the outset that we will not tax
health services. I do not think Canadians want that. When we are looking at the
value of those input tax credits to the health providers -- that is, doctors,
dentists, and so on -- we are looking at $350 million per year.
Senator Buchanan: Is it not true, though, that the others you mentioned, such as
physiotherapists, dentists, et cetera, can pass that on, whereas the doctors
Ms Stewart: It is fascinating that so many health practitioners have come to us
and said that they want to be exempt. They do not want us to charge tax on
their services and they want that clarified.
In the documentation and the new technical bill, there are areas to allow for
health practitioners to become exempt because that is their choice.
Senator Buchanan: Can they pass on any increases?
Ms Stewart: No.
Senator Oliver: On two occasions when you were giving your comments, you cited
with approval the report of the Atlantic Provinces Economic Council, APEC. You
said in your comments that the tax changes will be beneficial to the Atlantic
economy. As you know, that same report goes on to set forth some warnings about
some of the problems. You did not mention those today. There are three of them.
One is the tax-in pricing, which you have addressed.
I should like you to comment briefly on the other two major concerns that APEC
raises about the HST in Atlantic Canada. These concerns relate specifically to
the tax evasion effects created by the tax in certain areas and financing
problems created by the new tax.
Ms Stewart: When we talk about the issue of the underground economy, there are a
couple of things that are important to note. First, the size of the input tax
credits will be considerably larger than it has been. There is an increased
incentive for businesses to play by the rules because they get 15 per cent back
instead of 7 per cent. We expect that to have an implication.
When we talk about our strategy in the underground economy, in 1983 we
implemented a specific strategy targeting the underground economy. It is
working very effectively. In that partnership, we have developed strong
relationships with the provinces. This will be extended and developed even
further with the addition of new employees from the province who know their
milieu and can help us target effectively.
The thing that has been interesting to me over the last couple of years, has
been the fact that associations and agencies themselves representing different
sectors in the economy are coming to Revenue Canada and asking for a level
playing field. They are offering to work in partnership with us to find the
mechanisms that work particularly well for their industry.
We look at the construction industry, for example, where we have new measures.
We look at automobile dealerships. CADA has met with me and we will work with
them to find structures that speak directly to the used car business. We are
doing a similar kind of strategy in the hospitality industry and other areas
where we know there is a particular risk of leakage. So, yes, I am aware of
that, but, again, through good education and through solid and effective
enforcement, we will be able to manage this circumstance. It is something that
is very much a focus of our department and will continue to be without
Senator Oliver: And financing?
Ms Stewart: We spoke about the issue of cash flow earlier with Senator Stewart
in terms of Revenue Canada ensuring quick turn-around so that the input tax
credits get back into the hands of the businesses as soon as possible. Mr.
Burpee indicated some strategies that individual tax filers can use to ensure
that that time is mitigated and, hopefully, reduced to no longer than three
weeks using electronic filing and other methods.
Senator St. Germain: I gather that you accept that consumer-based tax is the
fairest and best way to go, since you are going along with this HST and GST? I
ask you this because in the Debates of the Senate in November 29, 1990, Senator
It is because I believe that the GST hits the Atlantic region unfairly and
disproportionately; because it imposes more burdens on the region than on other
regions, relative to the benefits which will accrue from the GST, that I am
opposed to this bill. It is why members on this side have been proposing
amendments to make it fair, and why in fact the Senate Banking, Trade and
Commerce Committee argued in favour of killing this bill. We did so, as I have
pointed out, because this bill is inherently unfair. It is unfair not only to
the people, it is equally unfair to the low-income regions of the country and
the regions of the country which lack a significant manufacturing base.
Has there been a massive change within the Liberal Party?
The Chairman: I am truly delighted that Conservative members of the Senate are
reading my old speeches. There is some potential for them being able to learn a
Minister, thank you very much for coming.
Our next witnesses are from Statistics Canada.
Please proceed with your statements.
Mr. Stewart Wells, Assistant Chief Statistician, National Accounts and
analytical Studies, Statistics Canada: I will try to cover the highlights on
The tax agreement that you are considering triggered the proposal for
strengthening the statistical system. I should like to note that there are
substantial benefits that will flow from that strengthening. In the long run,
we think that the benefits will in all probability turn out to be more
far-reaching than originally anticipated.
We are experiencing rising demand for more detailed national and regional
statistics and we think that this enhanced statistical system will go a long
way in that direction.
To some extent, the growing demands simply reflect a normal rise in advancing
analytical requirements. However, in the face of major changes in social and
economic institutions, both internationally and domestically, it has become
increasingly imperative to have richer, more reliable information if we are to
have any realistic hope of following, let alone controlling, events.
Institutional relationships are dissolving and reforming at speeds that were
almost unimaginable 20 years ago. The economic consequences of those shifting
involvements are already profound and becoming increasingly pervasive. Trade
patterns are changing quickly and so are the institutions and production
processes. Joint ventures, subcontracting, licensing, interfirm agreements and
an explosion of new financial instruments have combined to produce corporations
with intertwined structures and no national identities. Small firms are
flourishing out of this change in structure to which the Minister of Revenue
referred. We have growing pressures on income inequality and intense pressures
on the quality of income supports, job security, education, health and pension
At the same time all this has been happening, more responsibility for economic
and social policy is being transferred to provinces and territories, while the
principal levers of fiscal and monetary policy remain at the federal level. It
seems to us that cooperation and coordination among all levels of government
are more necessary than ever.
The current system of provincial economic accounts provides the necessary
framework to allocate the harmonized sales tax. However, the system and data
sources that support it were originally designed to produce estimates for
Canada as a whole. Provincial estimates are derived largely by disaggregating
the Canada-level estimates and are not now sufficiently robust to provide
acceptably reliable distributions of the taxes that are to be collected under
The necessary quality improvements in the provincial accounts will be obtained
through improvements to the accounts themselves, and by upgrading the data
sources and survey infrastructure that serve as inputs to those accounts. The
provincial economic accounts contain an extensive number and variety of income
and expenditure series that are derived from surveys, censuses and
administrative data sources.
The interprovincial input-output tables comprise approximately 200 separate
industries and 600 distinct commodities. Accurate measurement requires a
complete balancing of production, distribution and final consumption by
commodity and is therefore strongly dependent on information drawn from a
number of economic identities.
The most important step to upgrading the accounting framework itself will be the
production of annual interprovincial input-output tables which until now have
been put together at rather widely spaced intervals, whenever the necessary
funding became available. Because of that irregular nature, the input-output
tables have never been fully integrated into the annual estimates of income and
expenditure. More up-to-date and regular measures of commodity structure in
these accounts, along with the planned improvements to the source data, will
greatly improve their reliability.
Having said all that, the necessary improvements in data quality must come
through major improvements in the data collection process. The existing system
is insufficient at the moment.
We acknowledge that the new system is an ambitious undertaking. Its achievement
promises to bring enormous benefits in the form of more reliable, detailed,
timely, consistent and comprehensive statistical information. A number of
surveys will be redesigned to provide a better commodity structure and more
detail, and will have approximately the same degree of reliability in every
province. That is an important point because currently that is not the case
across the country.
I have a list of surveys. I will not read them. They must be redesigned and
redeveloped to provide the information we need. There will be a number of new
surveys reflecting the fact that the economy has been changing so quickly. We
will have an annual survey of the construction industry, which we used to have
years ago and had to give up at one point due to lack of funds. There will be
new annual surveys covering financial services, business management
consultants, real estate operators, residential repairs and renovations by
landlords, purchased service inputs by the forest, mining and manufacturing
industries, courier services, and waste management.
Let me conclude by pointing out something that I think is very important. We are
very mindful that this big improvement in the base of provincial economic data
must be realized in a manner which is sensitive to the burden that additional
form filling puts on the small business community. The increase in paper burden
will be held to the bare minimum that is necessary. We will do that by using
tax data instead of surveys wherever possible, by simplifying questionnaires, by
offering new, less costly electronic methods for business reporting and by
distributing the response burden equitably across provinces.
The Chairman: I wish to clarify one thing which was not clear from your
statement. Although the motivation for going into provincially accurate data
was to do the implementation calculations for the HST, am I correct in saying
that you will do it nationally? That is to say, you will have a similar data
base for every province. Is that correct?
Mr. Wells: That is correct.
The Chairman: I realize it was motivated by one region of the country but the
reality is you will be doing it nationally.
Mr. Wells: Yes. That system is complex and intricate. To work successfully, we
must balance the data from all of those provinces with the national data. The
balancing must be carried out across the country. To try to improve only one
part of it would not work well.
Senator Angus: I want to understand a bit more about these input-output tables.
Has this new framework been completed, or are you in the process of building
Mr. Wells: We have had a national input-output table since about 1961.
Periodically since then, we have built interprovincial input-output tables.
That multiplies everything, depending upon the number of provinces and
territories, by a factor of about 10, which costs a lot of money to do. It takes
some additional surveys. We must be concerned about interprovincial trade in a
way we are not when we do the national table because that washes out. We have
only been able to do it periodically. The most recent one refers to 1990. Prior
to that it was 1984. I am not sure, but that may well have been the first one.
I cannot remember. We propose to do them annually. If all of this works, we will
produce these interprovincial input-output tables annually. Because they are
complicated, there will be a lag, we think currently, of about three years.
Senator Angus: Is it not a fact that the principal purpose is to assist in
allocating the revenues back to the provinces?
Mr. Wells: It is not the principal purpose of the input-output tables. There are
many reasons to have an annual input-output table. We think they will benefit a
lot of users.
The provinces use our interprovincial input-output tables and have been
uniformly after us for some time to have them more up-to-date and more
frequently than we do them now. We would like to do that.
From our point of view, this makes it possible to do this. The other side, as I
said, is that we cannot do a decent job of providing the information that the
Department of Finance will need to allocate the tax. We cannot do that properly
unless we have a good national system.
Senator Angus: You mentioned that it is costly. Can you give me an idea of the
cost, not only the start-up cost but also the annual maintenance cost?
Mr. Wells: We propose that on an annual and ongoing basis, we need approximately
Senator Angus: That is annually?
Mr. Wells: It is annual in a sense, yes. When we get up and running at full
speed, it would cost approximately that per year.
Senator Angus: Is Statistics Canada developing the formula?
Mr. Wells: No, we have not developed a formula. We have advised them only in the
sense of the technical possibility of getting the necessary data to allow them
to apply a particular formula to which they have agreed. We have played no part
in determining a formula itself other than to say that we cannot do this or
Senator Angus: Would this $43 million be a cost? There is a further start-up
cost, is there not?
Mr. Wells: No. We have built towards that and we anticipate that we would be
fully operational with that amount in our budget.
Senator Angus: Would that be a cost that is attributable to having a fully
harmonized national sales tax?
Mr. Wells: Our objective is to produce the most robust and reliable estimates
possible, which means revised as little as possible. We supply data now for the
equalization payments and we are well aware of the pain that that causes when
there must be revisions.
We do not want to go into the system where they will have to start making
estimates right away and then Statistics Canada comes along in two, three or
four years and says, "Sorry, fellows, you have it all wrong." That is
really the basis for it.
Senator Angus: In the context of the present deficit cutting and downsizing
generally, from where will the money and the human resources come to do this?
Mr. Wells: The money would be given to us in the normal fashion within the
federal government that money is allocated. There would have to be various
Senator Angus: It would be new money to your budget, though?
Mr. Wells: Yes. In the start-up period human resources may be a problem in some
areas -- that is, in the sense of finding new people and getting them on board
-- but we are satisfied that we will be able to do it and produce the robust
estimates that we think are necessary.
Senator Angus: In the event that other provinces did not come on board in the
context of the HST, you would still have the national input-output tables that
you have used or for other things?
Mr. Wells: We have had the national input-output tables for years.
Mr. Philip Smith, Director General, Project to Improve Provincial Statistics,
Statistics Canada: Input-output tables are pretty much a standard tool
throughout the world for measuring the structure and the progress of an
As Mr. Wells pointed out, we have had input-output tables in Canada for more
than 30 years, but we have not had them at the provincial level. We have had
them at the national level with a couple of experimental exceptions.
When the Department of Finance began to develop this allocation formula, they
came to look at our input-output tables and concluded that the data contained
in those tables was what they needed for their formula. When they asked if the
data was available provincially, we had to say no. When they asked if the
current system was good enough to produce them provincially in equal quality
across provinces, we had to say no.
Senator Angus: So that a new model was made.
What about the burden on businesses and commercial enterprises, paperwork, and
so on? Is there an incremental burden as a result of that?
Mr. Wells: There will be some increase. We will be attempting to minimize that.
To the extent that it is at all possible, we will use tax data and other
administrative data. However, there will undoubtedly be some increase.
Senator Angus: Has there been a consultation process on this with business?
Mr. Wells: Not yet, but we are setting up a contact system that will consult
Senator Angus: I wondered if you have had their input-output on the envisaged
Mr. Smith: There is a consultative group on paper burden that is jointly chaired
by the Treasury Board and the Canadian Federation of Independent Business.
The Chairman: The CFIB, yes.
Mr. Smith: We have been active participants in that. We have mentioned that
there will be a new initiative, but the whole program is no new that we have
not had the opportunity to start consulting about the details of it.
Senator Hervieux-Payette: My colleague anticipated my question about
consultation. This is one of my concerns. I would think that the 700 surveys
would simplify the process of data integration and so forth. Is data collected
in other OECD countries? Is there any harmonization done at that level? When we
cannot compare the data with that of other countries, it makes the process
somewhat difficult to understand.
Do we start with this or do we wait to consult before making changes? Where do
we begin when we start to innovate with data collection systems? Do you look at
what European countries and OECD countries in general are doing? We are often
told that employment insurance -- previously unemployment insurance -- data is
not collected in the same way as in all OECD and G-7 countries.
When we hear that our neighbour has an unemployment rate of 5 per cent, this
does not mean that the rate is the same in Canada. Our business people are not
familiar with these various methodologies. They are not all skilled
statisticians like you. Do we collect data in such a way that it is
understandable both inside and outside the country?
Mr. Wells: I would like to think that our data is understandable both inside and
outside the country.
We do have extensive contacts and meetings with people from the OECD. There are
separate meetings there on national accounting and the input-output systems. We
do it with Eurostat, the statistical arm of the union, and with the United
States, Australia, France and England. That is something that is done.
Since there is no body that can enforce a set of practices, we do have
differences among countries. That sometimes leads to difficulty.
This is not an area where that is of prime importance, because there is an
international system of accounting that is fairly well adhered to, certainly
among western industrialized countries. I do not anticipate that that should be
a problem in that regard.
Senator Hervieux-Payette: With respect to this aspect of the data collection
system, do you feel that it will make us more competitive both fiscally and
internationally? When the process is improved, it will be easier to plan and to
harmonize the provincial and federal collection systems. We will then become a
more attractive country in terms of investment.
Mr. Wells: It will absolutely improve our ability to plan. That is precisely one
of the points that I was trying to make at the start about why it is important
to improve the statistical system across the country. There is no question that
it will be a great help in all of that kind of analytical planning activity.
Senator Hervieux-Payette: Therefore, you are going to justify the $43 million
down to the last penny. Is that correct?
Mr. Wells: Do you want an answer to that? We are satisfied that it will work. We
are very confident that it will do a decent job.
Senator Stewart: My question is very elementary. I am not a statistician, as you
are, so you will have to excuse me.
I read two sentences from your brief:
The revenues from the combined tax will be collected by Revenue Canada and
divided among the four governments...
Nova Scotia, New Brunswick, Newfoundland and Labrador, and Canada.
... by means of a specified revenue allocation formula. The formula is based in
large part on aggregate statistics compiled by Statistics Canada.
My guess is that this is a means of allocating the revenue that would not have
been suspected by the ordinary person. I suspect that the ordinary person would
have thought that, in the case of revenue that is collected by Revenue Canada
in Nova Scotia, the proportion for the federal tax would have been subtracted
and the balance would have been given to the provincial authority in Halifax,
and the same in New Brunswick and in Newfoundland.
What you say here suggests a much more sophisticated and opaque method of
distribution. Am I correct? Will you describe that method of distribution?
Mr. Wells: I hope that you are not correct.
The taxes will be collected in one pot. There is no ready means for knowing how
much goes to New Brunswick, the federal government, and so on.
Senator Stewart: What about the actual source of collection?
Mr. Wells: The tax does vary, and there are various exemptions of one sort or
another. For example, there is an exempt category, a zero-rated category, and
exports. All of that would require more detailed tracking through the reporting
system of business. By all accounts, it would be more expensive and more
burdensome on business than the current system ever would begin to be. It was
rejected for that reason. It certainly was one of the early candidates for
allocating the tax, but it is an immensely complicated process. The business
must keep more than one set of books. They must know which province they are
shipping to, whether they are shipping overseas, the source, the class of
customer they are shipping to, and whether they are shipping to a business or to
a final purchaser. That all requires an enormously more complicated set of
accounting arrangements than they have now, and the cost would be far more than
this will be.
Senator Stewart: This is the alternative to that.
Mr. Wells: Yes.
Senator Stewart: This is the one for which the government has opted?
Mr. Wells: Yes.
Senator Stewart: Let us consider the list you give. You were to have surveys on
Canadian travel, retail and retail commodities, direct-selling, new vehicles,
and capital expenditure.
Mr. Wells: Those surveys exist now. They are identified there as redesigned and
Senator Stewart: Let us take them all together as an aggregate. How will they be
used as raw material or input for the revenue allocation formula?
Mr. Wells: The formula includes types of expenditures which are to be taxed,
forms of expenditure by commodity and by category. The input-output system and
the provincial accounts system identify those categories of goods and estimate
their worth. The formula will then be applied to those estimates to arrive at
Senator Stewart: Would you take one province as a example and show us how it
Mr. Wells: If you had the time, we could show you how it will work now. We
publish annually a very detailed category of expenditure and income components
in the provinces. Periodically, we have done that by commodity as well.
Periodically we do that through an input-output system. That is very detailed.
It has about 200 industries and 600 classifications of commodities. We do that
now, and we will do it in the future, and we will do it better. We will be
doing it annually through that input-output system.
The data is fed in. We apply that in each province and at the national level,
and then you have a balancing system. In the note, we refer to certain things
as supply equals demand, for instance, or total income must equal total
expenditure. There are various ways of assessing the data, which is never
perfect. They are sample surveys, not censuses, and even censuses are not
perfect. You bring them all together, and through the provincial income and
expenditure accounts and the input-output accounts, you get a sensible picture
of how that must hang together. We then make adjustments to the basic output
from the surveys.
Senator Stewart: The government has made an effort to achieve a much more
inclusive harmonization of the sales tax than has been achieved. Was the
technique for assigning revenue as between the several provinces and the
Government of Canada, this technique you are now explaining, one of the reasons
some of the provinces backed off? Did they not like the technique, or did they
find it difficult to understand?
Mr. Wells: In the end, I am not sure that that is true. There were concerns at
the start within some provinces, although I am not sure by the provinces
themselves as a whole. There was an initial preference for tracking. I was not
party to those discussions; however, in the end, by signing they accepted that
this was a preferable method overall to do it.
Senator Stewart: The three that did sign?
Mr. Wells: Yes. I do not know why the fourth one did not sign, even though it is
my home province.
Senator St. Germain: How many people will you be required to hire in order to
put this new model in place?
Mr. Wells: Approximately 400.
Senator Simard: All here in Ottawa, no doubt.
Senator St. Germain: Will they be in Vancouver?
Mr. Smith: The estimate is approximately 350, perhaps 400, in Ottawa, and
probably twice that number across the country in the regional offices working
on a part-time basis collecting survey data.
Senator St. Germain: That is 1,050 new people?
Mr. Smith: If you are counting heads, it is about that number.
Senator St. Germain: Is this the new money you mentioned earlier that you will
Mr. Wells: That is part of the $40 million.
The Chairman: This is speculation on my part, but if the HST were not going
ahead, were you under other pressure to begin to move to provincially
aggregated data as opposed to purely national data? In the back of my mind, I
remember this issue being discussed 10 or 15 years ago.
Mr. Wells: You are quite right that it is a long-standing issue. We have been
under growing pressure to do that.
The Chairman: This was essentially instigated, but you probably would have got
Mr. Wells: I would have hoped that we would have got there anyway.
The Chairman: You indicate in your brief that, for the first time ever, you are
starting a survey of financial services. As you probably know, this committee
is the primary forum in Ottawa for the debate of public policy issues
surrounding financial institutions. This is not the time to go into the detail
of what is contained in the study. Would it be possible for our researcher, Dr.
Goldstein, to obtain a briefing from you on what will go into the study? Do you
have any sense as to when some output would be available? What is your sense in
terms of completing the first wave? At that point, this committee would be very
intrigued to have a presentation from you on it.
Mr. Wells: He certainly can obtain a briefing from us. We would be pleased to
come back before the committee.
Mr. Smith: In discussions with the banks and the insurance companies over the
past year about what form this survey should take and about what is feasible
from their perspective, the general objective is to measure the output of the
banks and insurance companies in interprovincial trade flows between provinces.
We are hoping to have some output from at least one of these surveys this year.
I believe one of the surveys is in the field right now. It is concerned with
the insurance companies. If it is not in the field, it soon will be.
The Chairman: With respect to the input and since you mentioned banks and
insurance companies, in some parts of this country such as British Columbia and
Saskatchewan, the credit union movement is such a dominant part of the retail
level of the financial services industry that it is important that we have
that. In other words, do not simply focus on narrowly defined banks and
Given the unbelievable growth in the last two or three years in the mutual fund
sector, and with low interest rates I presume there will be continued growth,
it will be important for us to understand as best as we can what is really
happening in terms of flows with respect to that sector. I hope that you will
define "financial services" not merely in the narrow context but in
the broader context.
Mr. Wells: The next time I speak, may I add this group to the people who are
pushing us to get these changes?
The Chairman: Frankly, both are important in the sense that you cannot really
understand the retail "banking" sector in this country without
understanding credit unions because of their dominant role at the provincial
level in a limited number of provinces. As well, you cannot understand what is
happening to capital flows, as least in terms of savings and investment flows,
unless you understand mutual funds.
Thank you very much for coming, gentlemen.
Our last witnesses this afternoon are Mr. Denis Desautels, the Auditor General;
and Mr. John Hodgins, Principal, Audit Operations.
Mr. Desautels, welcome. I realize that you have not appeared before this
committee before, although some of your predecessors did many years ago. Thank
you for taking the time to come here this afternoon.
Mr. L. Denis Desautels, Auditor General, Office of the Auditor General of
Canada: Mr. Chairman, I appreciate the opportunity to be here today with you to
discuss the 1995-96 financial statements of the Government of Canada and in
particular, the recording of transitional assistance for harmonizing GST and
PST in those financial statements.
However, before discussing this particular issue, I would like to spend a moment
reviewing my Opinion on the financial statements.
There is a good deal of judgment required in preparing and auditing summary
financial statements for an entity the size of the Government of Canada. Many
of the significant amounts reported in the financial statements are inherently
imprecise. They include allowances for valuation of various assets and
liabilities, pension liabilities, income tax collected for and remitted to the
provinces and significant transfer payments such as those under fiscal
arrangements. This accounts in part for the time it takes to finalize the
numbers and our audit of them.
I expressed what is often referred to as a "clean" audit opinion on
the government's 1995-96 financial statements.
In other words, I concluded and reported that members of this committee and
other users of the financial statements can rely on them to provide a complete
and fair picture of the government's overall financial situation.
Our audit opinion includes three overall conclusions. First, whether the
statements present the information fairly in all material respects. Second,
whether they are prepared in accordance with the government's stated accounting
policies. Third, whether those accounting policies are applied in a manner
consistent with the prior year.
In arriving at our opinion on the fairness of the government's financial
statements, we refer to the standards recommended by the public sector
accounting and auditing board of the Canadian Institute of Chartered
Accountants. These recommendations are gaining acceptance by governments across
Canada, and I support their adoption.
Our audit opinion precedes the financial statements in section 1 of the Public
Accounts, Volume I, which I have here. The last part of section I includes
longer form observations. They highlight a significant concern with how the
financial statements were prepared, which I will discuss in a moment. They
comment on accounting matters that require continued attention in future years,
together with more details on what our audit opinion means and how it was
In summary, it is important to realize that in giving our opinion on the
government's financial statements, we are not guaranteeing their absolute
accuracy. What we are saying, however, is that the financial statements taken
as a whole do not contain material or significant misstatements. Readers are
therefore entitled to conclude that the deficit is $28.6 billion as shown, plus
or minus reasonable tolerances.
However, there was one issue that concerned us greatly with respect to how the
financial statements were prepared. This was the recording of transitional
assistance for harmonizing the Goods and Services Tax and the provincial sales
taxes. As I point out in the observations, the inclusion of transitional
assistance of $961 million in the 1996 deficit and accumulated deficit
represents a departure from both sound accounting practices as enunciated by
the CICA and the government's own accounting rules. In my opinion, the
transitional assistance of $961 million should have been included in the
deficit of 1996-97 instead of 1995-96.
My reason for this is that transfer payments are not to be recorded as
liabilities and expenditures until the recipient has fulfilled the terms of a
contractual transfer agreement. At March 31, 1996, a contractual transfer
agreement had not even been signed; in fact, the agreements were not signed
until October 1996. Therefore, at March 31, 1996, the $961 million in
transitional assistance was not a liability, but rather a commitment.
Using less technical terms, in substance this accounting transaction occurred in
1996-97. While a good deal of activity occurred in 1995-96, much remained to be
done at March 31, 1996. As these events, including the signing of a contractual
transfer agreement, occurred in 1996-97, the transitional assistance should
have been accounted for in that year.
Although this misstatement did not result in a reservation in my opinion on the
financial statements because of the compensating effect of other factors, it
constitutes a serious matter that I believe should be brought to Parliament's
attention. I believe strongly that the government's financial statements should
be based on the sound accounting practice recommended by PSAAB.
Mr. Chairman, this concludes my opening statement. I would be happy to answer
any questions from the committee.
Senator St. Germain: You were discussing an amount of $961 million which was set
out in the 1995-96 budget. It appears that this is possibly a new method of
accounting that the present government is adopting.
I have documentation here which relates to the 1996-97 budget for research and
innovation of $800 million. These expenditures are projected to occur in the
next year but the legislation is not in place.
It is the same with the money that was handed out to the provinces, the $961
million. Basically, this money was forwarded to these provinces. I should like
to know how they dealt with it. Were you were able to follow up on how they
dealt with this? In theory, according to our information, they received the
money prior to the legislation being passed. We are only just dealing with the
Mr. Desautels: We do not know exactly how the provinces have handled the $961
million in their accounts. We only know part of the story, I think. First, we
know that the provinces did not record the $961 million, or parts thereof, in
their 1995-96 financial statements.
Whether they will record their share of this in the 1996-97 statements, we do
not know yet because we have not seen their financial statements. It is far
from certain that they will do so because the amounts paid to the provinces
relate to more than just the up-front cost. It relates to their additional
costs for a number of years. They probably have different options to consider in
terms of how they would account for that in their own financial statements.
Senator St. Germain: Is it a concern of yours, as the Auditor General, that the
government is now advancing money, in various instances, prior to the
legislation being passed? Is it in your purview of responsibility as Auditor
General to point this out? Is this in keeping with good accounting standards
and practices? That is the question.
Mr. Desautels: We obviously have a problem with recording in a year a particular
expenditure on the basis only of a statement in the budget.
In terms of good accounting, a number of other things must happen before a
transaction can be recognized. That is why we had difficulty with the $961
million and we stated that.
You referred to another $800 million in the latest budget which, on the surface,
probably has some of the same elements. When we actually do the audit of the
1996-97 financial statements later this summer, we will look at that very
closely. The 1996-97 financial year is not over yet. We will have to see what
happens between now and the end of the financial year.
Senator Simard: Auditor General, I can see your feelings and I accept your
reaction. I say that because I was a chartered accountant at one time. I
practised until I came into politics in 1970. I appreciate your concern and I
congratulate you for unmasking this government and denouncing this government
for cooking up the books.
Before I put another question to you, would you describe the nature of this
transitional system? Was it for costs incurred or loss of revenue for the first
couple of years? Was it as compensation for expenditure by provincial
governments until that time or for the foreseeable future?
Mr. Desautels: My description of the transitional payments is that they are
meant to cover two things: Some up-front costs by the participating provinces
and some loss of revenue by each province at least in the early years of this
Senator Simard: The loss of revenue may be for the time of the agreement, no
doubt. Is it a five-year agreement or is there a time limit?
The Chairman: I do not think it has a limit.
Senator Simard: The Auditor General said a few years. What are the few years?
What does the government take as a few years?
Mr. Desautels: The federal government applied a certain formula for determining
the amount of compensation to each of the provinces. In the formula, they
actually went out to four years. They included 100 per cent of the shortfalls;
greater than 5 per cent of current taxes in years one and two; 50 per cent of
the shortfall in year three; and 25 per cent of the shortfall in year four.
There was a formula that took into account the shortfall for the first four
years on a diminishing basis.
Senator Simard: Did you confirm the dates when the federal government sent their
cheques? The announcement of the agreement was made on April 30. I am sure they
did not send that cash that day. Maybe things have changed since my portfolio
in finance in New Brunswick, but, at that time, the provincial government
operated on a cash basis.
Mr. Desautels: The actual payments were made to the province only after the
agreements were signed in October of 1996. We will be actually auditing that as
part of our 1996-97 work.
Senator Simard: So we are really talking about cooking the books.
Mr. Desautels: I think our observations in the Public accounts explain our
concerns around this transaction. This is one particular transaction on which
we obviously disagreed with the treatment followed by the minister.
Senator Simard: We heard previous witnesses from Statistics Canada. I know you
have made observations in these years of deficit-fighting and belt-tightening.
You have unmasked and denounced a number of programs or transactions made by
this federal government and previous governments because you do quality
accounting or whatever.
Mr. Desautels: We report on value for money.
Senator Simard: You were here, I think, during the last hour and heard that
Statistics Canada, with the approval of government, will be spending $43
million per year, indexed naturally for each year. Do you think that is
reasonable? Of course, we all want better results and improved statistics. Do
you think the government was right in allowing this $42 million annual
expenditure while we are still in a deficit period? The Minister of Finance is
still projecting -- and I know he will be wrong -- that $19-billion deficit. It
is just before an election. Do you think that is a good decision, a good
Mr. Desautels: I cannot really answer that question. We commented strictly on
the accounting treatment of this transitional payment. We have not yet looked
at how all of this will be implemented.
The Chairman: It is very hard to do a value-for-money audit in advance of the
work actually being done.
Mr. Desautels: We do plan in the future to look at how these decisions are being
implemented. We do look for economy and efficiency. We are concerned about
that, but we cannot answer that at this time.
Senator Simard: Returning to the $1 billion, I realize that you would have
preferred to record the $1 billion in 1996-97. Since we are talking about
compensating the three provinces for a period of four years, are you
comfortable with this payment of a bribe being charged, even for 1996-97? Would
you have preferred that the government commit itself and future governments for
annual payments? I am asking about value for money.
The Chairman: Senator Simard.
Senator Simard: Would you allow the Auditor General to answer that, please?
The Chairman: In fairness, I give our questioners enormous leeway. The problem
is that you have asked a question which, assuming a witness could answer at
all, could only be answered in the context of having done a value-for-money
audit once the program was in place.
Senator Simard: Considering normal accounting recording and principles, is it
fair to have this federal government charging compensation in the 1996-97 year,
for example, for the next four years? Is this a reasonable practice in business
and for other governments?
Mr. Desautels: One can have an interesting discussion concerning whether or not
the federal government should compensate in one lump sum payment or spread the
amount over a period of years.
First, I take the position that it is a policy decision with which you do not
normally get involved. Second, I suppose it is part of the negotiations between
the different parties.
Senator Simard: I accept that.
Mr. Desautels: Once a decision is made, my job is to see that it is properly
carried out and properly reported. Initially, it is a policy decision.
Normally, we would not get involved in a policy debate and would let members of
Parliament carry that out.
Senator Angus: Mr. Desautels, I should like to add my word of welcome to our
committee to you and to Mr. Hodgins. Since it seems to be one particular issue
that you have brought to our attention, I will try to stay within that context.
Am I not correct in assuming that you are not here to comment at all on Bill
C-70 but, rather, to bring to our attention an element that relates to the bill
that you think that Parliament should know about?
Mr. Desautels: I was invited to address you about that particular issue that we
raised in our observations on the financial statement.
Senator Angus: I am interested in the process. In simple terms, as I understand
it, the government included in its accounts for the 1995-96 year an amount
that, in your view, should have been given in a later year. This was done to
take the hit earlier and to make the subsequent deficit appear to be lower.
That would be the inference from that. Is that correct?
Mr. Desautels: Charging it to 1995-96 shifts expenditures from a later year to
that up-front year, yes.
Senator Angus: The $28.6 billion would have been $27.6 in that year but higher
in the later year. Is that correct?
Mr. Desautels: That is the inference.
Senator Angus: I am interested in the process. As I understand it -- and,
correct me if I am wrong -- as in any business, you have gone to some length to
describe the complexity and the huge numbers that we are dealing with in
auditing a government. However, there is still a process, especially with
certain key items of negotiation with the auditors and discussion and dialogue.
Is that correct?
Mr. Desautels: There are a number of large items on the financial side of Canada
which require the exercise of a lot of judgment and obviously a lot of
discussion between those who prepare the financial statements and ourselves, as
the auditors. Yes, there is a lot of discussion.
Senator Angus: There are certain guidelines for the audit by your office of the
accounts of the government generally. As in the private sector, one of them
would be that materiality levels are established. Is that correct?
Mr. Desautels: Yes.
Senator Angus: What are those materiality levels? I am reading between the lines
of your document and it appears to me that you may be suggesting that $981
million is not material in the context of big government. I should like to get
a handle on that.
Mr. Desautels: I am not quite saying that. By any measure, $961 is material. If
it was not material, I would not have raised it at all.
I expressed what we call a "clean opinion" on the financial statements
of the Government of Canada because there were some other factors in the
various estimates that went the other way.
The Chairman: Yes, a counterbalance.
Mr. Desautels: There were some offsetting errors that actually brought down this
difference to something more acceptable.
Senator Angus: I am coming to that. Trying to follow the process and trying to
understand it on the basis of my understanding of the private sector model,
when would the books close normally? When would you sign off on the accounts
Mr. Desautels: We try to finish all our work for early September. The year end
is March 31. It takes the government a few months to prepare the first set of
financial statements. We carry out our audit in the summer months and we hope
that by early September we will have agreed on the final figure. It has taken a
little longer in some years, but our target is to have all this work done by
Senator Angus: In this case was it done by mid- to late September 1996?
Mr. John Hodgins, Principal, Audit Operations, Office of the Auditor General of
Canada: Yes, we had completed our work towards the end of September and we
actually signed off Mr. Desautel's opinion by the end of September. The first
release of the government's financial results came out in the Minister of
Finance's annual financial report in the first week in October. The public
accounts then came out around October 23.
Senator Angus: At what time did you discover this particular item in the 1995-96
accounts before you signed off for the year? Did it come to your attention
prior to sign-off?
Mr. Desautels: Certainly, this is one of the items that we had identified in the
course of our audit.
Senator Angus: It did not come later on?
Mr. Desautels: No. It was identified quite early.
Senator Angus: Given that you have confirmed that there is an ongoing dialogue
with that client, if you will, during the audit process, when you discovered
this amount was there a dialogue between your office and the Department of
Finance about whether or not to include this item in that year?
Mr. Desautels: Yes, there was. I think we referred to that in our observations.
We had many discussions with the Department of Finance to try to convince them
to reverse that accounting treatment but finance felt that they wanted to stick
to their position.
Senator Angus: In fact, you used the words that the fact that they did stick to
their position, as tenuous as you consider it to be, that caused you great
concern. On the barometer of concern, is that fairly high?
Mr. Desautels: Yes. Obviously, I would not have wanted to bring this to
Parliament's attention unless I thought it was something significant.
It was something that we thought was quite serious because we believed that the
annual financial statements must be prepared with sufficient rigour so that
they continue to be believable.
Senator Angus: Notwithstanding that, and notwithstanding your great concern and
these numerous attempts to convince them to leave it out until the appropriate
year, I understand that you did give a clean report because there were some
offsetting items. However, I think it is my duty to ask you if some pressure
was applied to you to give that clean report, notwithstanding your great
Mr. Desautels: The only pressure that was really applied to us was to try to
make us change our mind on that one issue. I think everything else flowed from
there. Finance had their point of view and we had ours. We tried to convince
them that we were right, and they tried to convince us that they were right. In
the end, we agreed to disagree and we had to take it from there.
Senator Angus: Yes, and you have done that. How high up the ladder does it go?
What is the highest level in the Department of Finance at which you expressed
your great concern?
Mr. Desautels: Obviously, these are discussions that included the highest level
in the department.
Senator Angus: Up to the minister?
Mr. Desautels: Up to the minister, yes.
Senator St. Germain: Mr. Chairman, do you not feel that it is an affront to the
committee, and to all of us, that the money has been advanced in this instance?
Despite the arguments the Auditor General has tried to put forward, the
government is not being respectful to the processes of Parliament by doing this
before the legislation is passed. This is like making a loan before you sign the
loan agreement at the bank.
The Chairman: It is not dissimilar. I am not defending it. I am just telling you
that this is an issue which Senator Stewart has often raised in this committee.
Senator Angus: They were acting high-handedly.
The Chairman: There have been cases where we have passed budgets bills from
budgets that are at least 18 months old. Indeed, we had a case fairly recently
where the government proceeded on the basis of a policy statement made by the
minister -- in fact, by a junior minister in a paper called a discussion paper.
Officials were using that discussion paper as if it were law and I think it is
not unfair to say we reacted very strongly to that. I am sympathetic to your
Mr. Desautels: If it may be of any help, as I understand it, the payment of the
$961 million was included in the Budget Implementation Act.
The Chairman: That is right. This has been an ongoing issue with this committee.
It has nothing to do with this specific transaction. The issue is the tendency
of government to assume that Parliament will approve whatever the government
has announced. This committee has taken the position, on a whole host of issues
not just this one, that that is an affront to the parliamentary system. In the
couple of cases recently, we have actually amended government legislation quite
substantially. It so happened they were bills that were not already enacted,
but were we to do that with a bill the government was already acting on, it
would create a very interesting and difficult situation, although that would not
stop us passing the amendments if we thought they were important.
Senator Stewart: The whole matter of imposing taxes before the authorizing
statute has gone through is one in which I have been interested around here for
over 25 years. In fact, in 1969, I raised the possibility of a statute
comparable to the one they have in the United Kingdom, the Provisional
Collection of Taxes Act. My proposal got nowhere. What they have in the U.K. is
a statute which authorizes government to bring into effect tax changes such as
increases in liquor taxes, tobacco taxes, and so on, at midnight on the day the
budget is delivered, but the changes will be cancelled unless, before specified
dates, the enacting legislation has gone through the Parliament of Westminster.
My proposal for a comparable statute here really never moved forward, although I
think there is at least one person who has tried to move it forward in the
intervening years. Why? Even with majority governments, it has not moved
forward. I think the problem is the Senate. They are afraid that the Senate
might very well defeat a government measure even after the tax had been put into
effect. It is slightly comparable to what happened to the tax brought in by Mr.
Crosby on gasoline, but it is the Senate that is the systemic villain in the
thinking of some bureaucrats. However, that is an anecdote of interest perhaps
only to myself.
Senator Angus: No. It is great stuff.
Senator Stewart: I wanted to ask a couple of questions concerning the facts in
There seems to be a suggestion -- perhaps that is not strong enough language to
satisfy one or two senators -- that an effort was made to inflate the 1995-96
deficit so as to make the deficit for the following year look better. Yet you
said that there were offsetting items in the accounts for 1995-96. The fact
that there were offsetting items suggests that there was not an overall strategy
of deliberately reducing the amount in the 1995-96 accounts.
Would the part of the accounts which contained the item that we are now
discussing, and the part of the accounts in which the offsetting items were
incorporated, have been dealt with by the same person or the same officer? Is
it a case of the left hand not knowing what the right hand is doing, or what is
happening here? If the same person or same officer is involved in all of the
items, then the suggestion that the $960 million or so was put in deliberately
does not fly.
Mr. Desautels: I do not think we made the suggestion to which Senator Stewart
alluded. We brought to Parliament's attention the fact that there was one
particular item of $961 million that was not properly handled in the accounts.
That on its own is a significant item. That was not handled properly, as far as
we are concerned, even after fairly lengthy discussions between ourselves and
the Department of Finance.
That on its own is a significant item regardless of what motives one may ascribe
to that. On its own, it was worth bringing to Parliament's attention and also
insisting that in the future that sort of thing not occur.
Senator Stewart related that to offsetting items that I mentioned and therefore
concluded there was no real strategy. Those things were all arrived at fairly
independently. There is a reason that there are left in the books some other
differences such as these offsetting errors.
At one point in the process, when Finance strikes what they think is a final
figure and announces what the deficit will be, they are loath to move from that
figure and accept further corrections that are identified as the result of the
That is why we are left in the end with other differences that are not adjusted
and which we would like to have adjusted because at that point finance feels
the books are closed or frozen and they make no further adjustments. It is not
necessarily any kind of overall strategy, but those two series of events
occurred quite independently.
Senator Stewart: I did not intend to say or imply that it was your suggestion
and you are quite correct to make it clear on the record that it was not your
You had an argument, I gather, with the appropriate person or persons in the
Department of Finance. They would hardly have given the reason that you stated
for not heeding you, namely, "Look, we have put out a figure. We must
reach it." What did they say to you?
Mr. Desautels: The position of the Department of Finance on this is that, in
their minds, there was a commitment made to pay out that $961 million in
1995-96. Therefore, that commitment and that obligation should be booked as an
expenditure immediately when it was made.
Their argument is that, as the government or ministers who are in a position to
do so commit the government to certain things, that commitment should be booked
immediately as an expenditure.
Their explanation is that that is what they want to do. I agree with that to a
point, except that there are some generally well-accepted accounting
conventions that also must be respected and that we would record expenditures
when those conventions have been generally met.