Proceedings of the Standing Senate Committee on
National Finance
Issue No. 32 - Evidence - May 9, 2017 (morning sitting)
OTTAWA, Tuesday, May 9, 2017
The Standing Senate Committee on National Finance met this day at 9:33 a.m. to study Bill C-44, An Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017 and other measures.
Senator Percy Mockler (Chair) in the chair.
[Translation]
The Chair: Welcome to this meeting of the Standing Senate Committee on National Finance.
[English]
My name is Percy Mockler, senator from New Brunswick and chair of the committee. I wish to welcome all of those who are with us in the room and also the viewers across the country who may be watching on television or online.
[Translation]
As a reminder to those watching, these committee meetings are open to the public; they are also available online, on the Senate website.
[English]
All other committee-related business can also be found online, including past reports, bills studied and lists of witnesses.
I would now like to ask the honourable senators to introduce themselves, starting on my left.
[Translation]
Senator Woo: Good morning. My name is Senator Yuen Pau Woo from British Columbia.
Senator Moncion: Senator Lucie Moncion from Ontario.
Senator Pratte: Senator André Pratte from Quebec.
Senator Forest: Senator Éric Forest from the Gulf region of Quebec.
[English]
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
[Translation]
Senator Eaton: Nicole Eaton from Ontario.
[English]
The Chair: Honourable senators, I would like to recognize the clerk of the committee, Ms. Gaëtane Lemay —
[Translation]
I would also like to introduce our two analysts, Sylvain Fleury and Olivier Leblanc-Laurendeau, who team up to support the work of this committee.
[English]
Today, honourable senators, viewers and witnesses, we begin our consideration of the subject matter of Bill C-44, which was referred to us by the Senate yesterday evening. Bill C-44, An Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017 and other measures, is what we call the Budget Implementation Act. This type of legislation is squarely in line with the mandate given by the Senate of Canada to the National Finance Committee.
To begin our examination of the subject matter of the bill, we have before us a number of officials and professional people. With the senators — a team approach, so that we can do the proper analysis for accountability and transparency of Bill C-44 before us.
I would like to remind all senators and witnesses that the sponsor of the bill is Senator Woo, a member of the National Finance Committee. Congratulations, Senator Woo.
Honourable senators, if there are parts of this binder that are of less interest as we go forward, with your agreement and consensus, I will ask officials to spend less time on them, and the sections you are more concerned with will be given a lot more due diligence.
With that, today we welcome the first three witnesses. The main speaker will be Mr. James Wu, Chief of the Funds Management Division, Financial Sector Policy Branch of the Department of Finance Canada. He is accompanied by —
[Translation]
— Nicolas Moreau, Director, Funds Management Division, Financial Sector Policy Branch.
[English]
Also, we welcome Ms. Anne David, Advisor/Economist, Funds Management Division, Financial Section Policy Branch. At this point in time, I will ask you to move to our binder — Division 2, "Public Debt.'' We will ask Mr. Wu to make the presentation for that section. Division 2 in your binder, "Public Debt,'' clauses 103 to 107.
[Translation]
Mr. Wu, you have the floor.
[English]
James Wu, Chief, Funds Management Division, Financial Sector Policy Branch, Department of Finance Canada: Senators, it is our pleasure to be here to assist you with the review of Division 2, Part 4, of Bill C-44. This starts at clause 103 of the bill and it enacts a borrowing authority act which would return approval of the borrowing activities of the government to Parliament. I believe this is an issue that has been of interest to some of your colleagues.
Before 2007, borrowing approval was a parliamentary approval and subsequent to that a budget implementation act in 2007 removed the requirement for parliamentary approval. So the government, in its electoral platform, has recently decided to reintroduce parliamentary approval.
In Budget 2016, the government announced this initiative and some initial adjustments were made to the legislation. Before you today in Bill C-44 is actually the first proposed borrowing authority act that would implement this framework.
The approach that was taken was to find a balance between providing transparency and accountability to Parliament while also maintaining flexibility to effectively fund the government's fiscal policies and operations. I will highlight some of these aspects as I go through my presentation.
Starting with clause 103, you will see the bulk of the borrowing authority act is set out there.
I would high light three key elements: First, in this borrowing authority act we are including the borrowings of the government as well as agent Crowns. This is the first time that a borrowing authority includes agent Crowns. We believe this is a more appropriate and transparent way to reflect the government's borrowing activities.
A second element is that we include the total stock of borrowing activities. In previous borrowing authorities, it was the flow concept that was approved, so the annual issuances were approved, whereas now we propose to request an approval on the total stock of debt of borrowing activities of the government and the Crowns.
A third element is that we are proposing to return to Parliament within every three years to report to Parliament on the borrowing activities of the government and Crowns in respect of and in relation to a set limit. We believe this provides greater transparency. As some of you may recall, in the pre-2007 framework, there was no requirement to come back to Parliament if the financial requirements of the government were not increasing.
These are the high-level elements in clause 103.
Let me give you a description for how the number was derived. There is a limit reference in section 4 of clause 103, the $1.168 trillion. As I outlined to you, this includes a number of components. The first one is the current stock of government debt — that is, the government's own borrowings — of $691 billion. Another component is the current stock of Crown borrowings, and that is $276 billion. These two add up to $967 billion as the total current stock of outstanding debt. In addition to that, we project out, using the budget projections, three years of financial requirements for the government consistent with the budget. This amount, for the three-year projection, is $103 billion for the government; for Crown corporations, for the three-year projection, it is $43 billion and on top of that, we add a margin of prudence or contingency of 5 per cent, which is $56 billion.
In total, this adds up to the $1.168 trillion figure. To highlight for you, it represents an incremental borrowing of $146 billion over this three-year period for both the government itself and the Crowns.
The reporting requirement starts at clause 8. To highlight some of the components for you, we propose that, basically, the reporting requirement be tabled soon after the budget is tabled so that we can align our projections with the fiscal forecast in the budget. It would contain the components of the borrowings of the government, as well as the Crowns. The key element here is under paragraph (c) where the minister will provide an assessment of whether or not the government needs to adjust the amount set out as the limit, whether it should be increased or even decreased. This would happen every three years.
Let me stop there. That is the key part of this division. There is another element related to exchange rates, which I am happy to brief on momentarily but I think that is a separate issue.
The Chair: We would appreciate it if you would inform the committee and then we will go to questions.
Mr. Wu: I am happy to do so, Mr. Chair.
Starting with clauses 104 and 105, this is a technical amendment to adjust the Financial Administration Act and the Hibernia Development Project Act to replace references to a daily noon rate to another average rate or rate set by the minister with respect to the Financial Administration Act, because the Bank of Canada, the provider of these rates, will no longer be providing or creating a daily noon rate.
The Bank of Canada, consistent with recommendations or guidance from the Financial Stability Board and International Organization of Securities Commissions, has decided not to provide a noon rate anymore and is switching to an average daily rate. It is very technical.
The Chair: Before I ask Senator Marshall to start the line of questions, I would ask Senator Andreychuk to introduce herself, please.
Senator Andreychuk: Senator Andreychuk, from Saskatchewan.
Senator Marshall: Thank you, Mr. Wu, for that introduction. You have answered most of my questions in your opening remarks. However, I have a couple of other questions.
When you gave the breakdown of the $1.168 trillion, you said $276 billion were for Crowns. Are you able to tell us how much is for CMHC? In the bill itself, CMHC is mentioned individually and all the other Crown agencies are scooped together and called "agent corporations.'' What is the dollar amount for CMHC? How much of the $276 billion is for them?
Mr. Wu: Thank you very much for the question. For CMHC, we have two components. For CMHC itself, in terms of its own operational activities, it is $282 million. For a subsidiary of CMHC, the Canada Housing Trust, which is a special purpose vehicle, the figure is $217 billion. That represents a large portion of the Crown debt.
Senator Marshall: The rest would be for the other agent corporations.
Are there a lot of those other agent corporations, or would it be just the Export Development Corporation? Is it just half a dozen or more than that?
Mr. Wu: Yes, it is about half a dozen.
Senator Marshall: Could you tell us what they are.
Mr. Wu: I would be happy too. I will grab my list.
As you mentioned, senator, there is the Business Development Bank, CMHC, which we covered; Farm Credit Corporation Canada; the Canada Deposit Insurance Corporation, Export Development Canada; Canada Post; Royal Canadian Mint; Canadian Dairy Commission; Canadian Commercial Corporation; Freshwater Fish Marketing Corporation; and there is an entity called Parc Downsview Park; and the Federal Bridge Corporation Limited.
I should inform you that not all of those have significant borrowings and only, as you suggested, about half a dozen show up.
Senator Marshall: CMHC would probably be the biggest one.
Mr. Wu: Yes, indeed.
Senator Marshall: Is CMHC mentioned separately because it is the biggest one?
Mr. Wu: Thank you for the question. Yes. It is mentioned separately because it's the biggest one, and then also because of the different structure that it has using the Canada Housing Trust. Because it has the Canada Housing Trust, which is a special purpose vehicle but a subsidiary of CMHC, we needed to make a specific reference to it.
Senator Marshall: My final question relates to the three-year reporting period. What is the rationale for that? Usually what you see is an annual reporting. It is not like it is confidential information. You can go to CMHC and to those agent corporations and calculate the amount yourself; right? What was the logic for the three years?
Mr. Wu: Reflecting on your initial comment, yes, indeed. Not only do these corporations provide that information, our annual debt management strategy as well as specifically the debt management report provides this information on an annual basis to Parliament.
On the selection of a three-year process, that is to find the right balance between providing regular transparency to Parliament and the potential to change legislation, the borrowing limit, with the need to provide the government some operational flexibility in meeting its fiscal policies, so giving it a borrowing horizon of roughly three years to manage its fiscal policies.
Senator Marshall: Even though the information is readily available?
Mr. Wu: Yes, indeed.
Senator Eaton: Perhaps you could explain something to me, Mr. Wu. I thought Crown corporations were arm's length independent entities?
Mr. Wu: Indeed, they are meant to be arm's length.
Senator Eaton: "Meant to be?'' I am sorry.
Mr. Wu: I am happy to get to that momentarily. They also operate on commercial terms. These Crowns are agent Crowns. That means that agent Crowns' liabilities are, by law, the liabilities of the Government of Canada. When we review the borrowing authority and the review of borrowing activities of the government, it was determined that the borrowing of agent Crowns, because they are the liabilities of the government, should be included to provide greater transparency.
Senator Eaton: So their borrowings have to go through the Minister of Finance?
Mr. Wu: Yes, indeed. The Minister of Finance approves them.
[Translation]
Senator Forest: Thank you very much for your presentation. In order to evaluate the rhythm of the borrowing capacity, we are currently involved in quite a specific effort in the infrastructure program. I assume that the plan to invest more than $120 billion over five years is accounted for in your forecasts. After three years, the program will almost be over and at the end of its second phase. If we took away the infrastructure component from your $103 billion envelope, what would the cruising speed of government borrowing look like, without this quite unique and one-time effort on the part of the government?
Nicolas Moreau, Director, Funds Management Division, Financial Sector Policy Branch, Department of Finance Canada: What you have to bear in mind is that the financial needs are based on what was announced in the budget. We are forecasting a deficit for the next five years. It is difficult to exclude the part earmarked for investments as such. The government announced major investments that are already accounted for in the anticipated deficits. However, in terms of the growth of the debt, you have to relate the anticipated debt to a percentage of the GDP and see it as a proportion of the debt.
I have no precise figures about the rates of growth, but any forecast of the growth of the limit we impose is a function of the government's financing and refinancing needs, as announced in the budget.
Senator Forest: So, inside the $103 billion, there are two one-time, recurring problems that will have an impact on the increase or the decrease on the maximum level of debt approved.
Mr. Moreau: The ceiling is a function of the deficits. If you subscribe to the hypothesis that deficits are cyclical, there should be no long-term pressure on the ceiling.
[English]
Senator Pratte: You talked about a safety margin of 5 per cent. How did you come to that number?
Mr. Wu: Under the current borrowing authority framework, there is also a margin. Right now it is roughly, on average, $40 billion to $45 billion. Notionally, when we looked at having a contingency margin for this new framework, we selected 5 per cent. The 5 per cent number arises out of a result of $56 billion, which was deemed to be appropriate because we are also adding in the Crown debt.
I should explain. The current framework where we have about a $40 billion to $45 billion margin is only applicable to the government debt. It was deemed appropriate to have a slightly larger margin to cover the Crown aspect.
Senator Pratte: Since I am new here, if I understand this correctly, if ever there was a huge recession, for instance, and the government decided that it had to invest huge amounts of money in the economy, and it had to borrow more than $1.168 trillion, that means it would have to go back to Parliament to borrow more; is that correct?
Mr. Wu: I should clarify.
Senator Pratte: If its debt had to go over $1.168 trillion. Or do I misunderstand this?
Mr. Wu: No. My apologies. One element I should highlight further. I mentioned in 2016 the government had already made adjustments to the legislation. There is one adjustment that covers this scenario. In Budget Implementation Act 2016, No. 1, there was an amendment proposed to the Financial Administration Act which would allow the government to borrow beyond the limit for extraordinary reasons, which could include the scenarios you highlighted.
There is a framework around how that works. If the minister or government needed to undertake such borrowing, it would be required to return to Parliament and make a report on why it did so.
Senator Pratte: I remember that.
The Chair: We will move to Division 4, which is at tab 4 in your binder, called "Shared Services Canada Act,'' Clauses 113-114.
We have before us Pat Breton, Director General, Procurement and Vendor Relationships, from Shared Services Canada.
Pat Breton, Director General, Procurement and Vendor Relationships, Shared Services Canada: This morning, as mentioned, I will be speaking to clauses 113 and 114, found in Division 4, Part 4.
Shared Services Canada is proposing amendments to our act to provide the minister responsible for SSC with similar powers as those of the Minister of PSPC. These changes are administrative in nature. The proposed changes would enable two separate yet related elements.
The first is that it would enable the minister to delegate to other ministers the ability to procure goods and services related to SSC's mandate, namely, related to email, data centre, network and workplace technology devices. This is captured in clause 113.
Then the second element is that it would allow the minister to authorize another minister to deliver to themselves SSC's mandated services in exceptional circumstances. This is captured in clause 114. Similar to the way that PSPC currently uses these powers, these changes would be governed by letters of instruction from the minister responsible for SSC to his or her colleagues.
Before providing some tangible examples relevant to these proposed changes, perhaps I can provide some context into how we got here. In September 2015, SSC's mandate was clarified. After two or three years in existence, it was determined there was some overlap between the mandates of SSC and PSPC that resulted in confusion internally and with the vendor community, some inefficiency due to lack of consolidated purchasing, and potential security vulnerabilities. When this mandate was clarified, SSC assumed responsibility for a number of existing PSPC procurement vehicles. However, we didn't receive the legislative change that would support these tools.
This led to a tremendous spike in low-value, high-volume transactions. In the 18 months from September 20, 2015, to March 30, 2017, SSC processed an additional 23,000 transactions, 80 per cent of which are of a value of less than $25,000.
I will provide some examples in terms of what sorts of commodities and goods we would look at delegating. The first, which is an obvious example, is peripherals such as keyboards and USB keys. Currently, all departments and agencies must come to SSC to purchase something as simple as a USB key. That wasn't the intention when SSC was created; that is not part of delivering an enterprise service. However, it's an effect of the transfer that took place two years ago. Therefore, it would be a strong candidate to delegate back to departments.
An area that would be more strategic would be print, printing products and multifunction devices. SSC is in the process of running a procurement right now that will establish catalogues of consolidated, security-validated products that departments and agencies could avail themselves of, should this measure be in place, where SSC would do the leg work in terms of establishing the catalogues and departments would then have the ability to draw down off those catalogues.
Third, in some areas such as laptops, desktops and tablets, we'll look at on a case-by-case basis where, in some instances, there are economies of scale in aggregating, consolidating and standardizing the government buy. In those instances, we will assess on individual categories.
In terms of the ability to authorize another minister to deliver SSC's mandated services to itself in exceptional circumstances, I'll leave the committee with a couple of examples. The first is embassies and consulates abroad. According to our legislation and act, SSC is obligated to provide all services related to our mandates in all locations where the government has a presence. That's not efficient, it's not effective and, frankly, it's not feasible in a lot of situations. These initiatives would empower departments such as Global Affairs Canada to locally provide those services with local employees. DND missions abroad would fall into that same category of exceptional circumstances.
So while administrative in nature, these proposed changes would provide additional flexibility to SSC in meeting our mandate and improving our service to our customers.
Mr. Chair, I'll stop there and allow for questions and comments from the committee.
The Chair: Thank you very much, Mr. Bretton.
Before I ask Senator Marshall to start the line of questioning, I would ask the deputy chair to introduce herself please.
Senator Cools: Gladly. My name is Anne Cools, deputy chair of the committee. I have been with the Senate for 33 years, and I plan to retire next year, a year from August 12. I turn 75. But as always, it's nice to be here. I am an old member of this committee; I've been a part of it for many years. It was my job to produce the speeches on the appropriation acts.
And I was approached by many when news of this new session and Mr. Trudeau started, who thought I should take up the job again, and I have accepted it. I thank you, and I'm pleased to welcome you all here.
The Chair: Thank you.
Senator Cools: I also have some questions for Mr. Breton.
The Chair: Thank you, Senator Cools.
Senator Marshall: Thank you, Mr. Breton, for those opening remarks. Once the minister has delegated, is the minister still ultimately responsible for what is delegated or does the responsibility then shift to the minister to whom it has been delegated?
Mr. Breton: It depends on the specific circumstance — I'll throw that general caveat out there — but SSC remains the contracting authority for IT and IT goods and services for the Government of Canada. We envision the lion's share of the usage of this delegation power being the establishment of catalogues that SSC would establish; SSC would do the actual pre-procurement, if you will; and set those rules and obligations that departments would then use to access the catalogues. However, from financial management and asset management, it is the departments that would be using their money; they would authorize the individual purchases off those catalogue items.
Senator Marshall: So they would be responsible. Will it be disclosed publicly what is delegated, or is it something that is internal?
Mr. Breton: It would be disclosed. Transactions would also be captured in departmental proactive disclosure requirements and other open government forms.
Senator Marshall: Is the Phoenix payroll system something that has been delegated or could be delegated? I think the Minister of Procurement is responsible for that. Could you use that as an example as to whether that is already delegated or whether it could be delegated?
Mr. Breton: As a program and an application, that was not within SSC's mandate as a service to provide. So that was with —
Senator Marshall: 100 per cent with —
Mr. Breton: — the minister of PSPC. SSC's role would be in providing the IT infrastructure that underlaid and supported that, data centres and such things.
Senator Marshall: Thank you very much.
Senator Cools: Mr. Breton. I'm having difficulty grasping the delegation of powers to another minister. I notice that the note here in the documents on your department, Shared Services Canada, may "delegate to another minister the ability'' — I don't think you delegate ability; I think you delegate power — "to provide any or all of SSC's services in relation to its mandate; for example, the minister responsible for Public Affairs Canada supports embassies abroad.''
I have always understood that every ministry has its own statute. There is the Department of Justice Act. The list is endless. I was always under the impression that you have a high degree of responsibility as a minister to stay within the confines of your department's act. But the way this is phrased here — I could be perhaps overreacting a little bit — it sounds terribly arbitrary.
Could you perhaps clarify my doubts or remove them a bit?
Mr. Breton: Certainly. You're correct, senator, the enabling legislation for departments and ministers is very well established. In the case of SSC, no minister has the authority currently to provide any goods or services related to e- mail, network, data centre or workplace technology devices to themselves. This would enable the minister responsible for SSC to, in exceptional circumstances, extend that aspect to another minister.
I mentioned the example of missions abroad. How the operationalization of this would roll out is we would need an SSC employee who is authorized by the SSC minister to be establishing Internet connections in Tel Aviv or capitals around the world. That local Global Affairs employee is not currently enabled to do that because their minister and the powers flowing down from the minister do not authorize them to do any activities related to SSC's mandate.
So this is one where, frankly, after a couple of years in execution, we discovered that a few use cases maybe weren't quite worked out when we were established, and that it wasn't the intention, while establishing an enterprise service, that there were elements where those lines may have been too rigid in terms of dividing the powers between ministers. So this allows some flexibility to provide better service to our customers.
Senator Cools: As long as you stay within the framework of your statute, and go outside for a moment.
Mr. Breton: Correct.
Senator Cools: Because I would not be happy with you. Thank you.
[Translation]
Senator Forest: Did I understand correctly that the minister responsible for Shared Services Canada can only delegate to another department, not to a Crown corporation or to an independent company?
Mr. Breton: No.
Senator Forest: He can only delegate to someone who is accountable to Parliament?
Mr. Breton: That's right. Section 7 of the Shared Services Canada Act describes how that delegation is done within a department. It is done from one department to another.
Senator Forest: Fine.
The Chair: Are there any further questions? I have a question to put to Mr. Breton, if I may. I fully understand the clarification you gave us. But how would your proposal change or improve the performance of Shared Services Canada?
Mr. Breton: It would allow us to have the resources necessary for our staff to work on major projects and, at the same time, it would allow other departments to use our tools themselves. That is the kind of efficiency it would bring.
The Chair: There would certainly be an improvement in efficiency and accountability.
Mr. Breton: Exactly.
The Chair: Thank you. Honourable senators, if there are no further questions, we will begin Division 6 of Part 4.
[English]
This is tab number 6. This will be financial assistance for students, and we have the officials from Employment and Social Development Canada.
[Translation]
We will ask Steven Côté, David Moore, Christine Nagy and Atiq Rahman to introduce themselves.
[English]
So it is Division 6, tab 6, financial assistance for students, clauses 116 to 121, and you will find it in your binder at tab number 6.
The witnesses from Employment and Social Development Canada will be Mr. David Moore, Director, Program Design, Canada Education Savings Program; Atiq Rahman, Acting Director General, Canada Student Loans Program; Steven Côté, Director, Policy and Research, Canada Student Loans Program; and Christine Nagy, Senior Strategic Planning Advisor, Canada Education Savings Program.
I have been informed by the clerk that the presentation will be made in order to explain clauses 116-121 first by Mr. Rahman, to be followed by Mr. Moore.
[Translation]
Mr. Rahman, you have the floor, please.
[English]
Atiq Rahman, Acting Director General, Canada Student Loans Program, Employment and Social Development Canada (ESDC): Thank you, Mr. Chair. I will cover clause 116.
The Canada Student Financial Assistance Act currently limits who can be a qualifying student to Canadian citizens and permanent residents as defined in section 2(1) of the Immigration and Refugee Protection Act and protected persons within the meaning of section 95(2) of the same act. As a result, persons who are registered as Indians under the Indian Act, but who are not Canadian citizens, are not eligible for student financial assistance under the Canada Student Financial Assistance Act.
Amendments to the Canada Student Financial Assistance Act will be introduced to provide that persons registered as Indians under the Indian Act will be eligible for student financial assistance, regardless of their citizenship. That's clause 116. Thank you, Mr. Chair.
The Chair: Thank you. We will follow with Mr. Moore?
David Moore, Director, Program Design, Canada Education Savings Program, Employment and Social Development Canada (ESDC): Yes, that is correct.
The Chair: We will finish the explanations of the clauses and then senators will ask you questions.
Mr. Moore: Thank you. My presentation will focus on clauses 117 to 121 of Part 4, Division 6. I would like to give context to explain that. Canadians use registered education savings plans, or RESPs, to save for a child's post- secondary education. RESP savings grow tax-free until they are withdrawn to pay for full- or part-time studies at a trade school, CEGEP, university, college or apprenticeship program.
The Government of Canada offers two education savings incentives linked to the RESPs to help Canadians save for the post-secondary education of the children.
So the two education savings incentives are the Canada Education Savings Grant, which is available to all Canadians to help save for a children's education, and within that, there is an additional amount for low- and middle- income children to help them save faster for their children's education.
The second education savings incentive is the Canada Learning Bond, and that's available only to low income Canadians for children born in 2004 or later, and no personal contributions are required for the Canada Learning Bond. So under the current legislation, requests for the Canada Learning Bond and the additional amount of the Canada Education Savings Grant submitted by anyone other than the primary caregiver, which is a person principally responsible for the care of the child, are declined.
So the Canada Education Savings Act, which governs the administration of these education incentives, is being amended to permit the primary caregiver's cohabiting spouse or common-law partner to apply for the Canada Learning Bond, and the additional amount of the grant on behalf of the child.
It's anticipated that, by allowing the spouse or the common law partner of the primary caregiver to also apply for these education savings incentives on behalf of the child, the beneficiary, fewer education savings incentive requests will be declined, thereby resulting in an increase in the take-up of the Canada Learning Bond. So it should be noted that the eligibility requirements for the Canada Learning Bond and the additional amount of the Canada Education Savings Grant have not been changed.
In support of the change, the Canada Education Savings Act is being amended to permit the primary caregiver's cohabiting spouse or common-law partner to designate a trust for a Canada Learning Bond or the additional amount of the Canada Education Savings Grant on behalf of the child to permit the primary caregiver's cohabiting spouse or common-law partner to apply to the minister to waive certain requirements of the act or the regulations to avoid undue hardship. Finally, it provides the rules for payments of the additional amount of Canada Education Savings Grant in situations where more than one trust has been designated. Thank you.
The Chair: Therefore, since we're on Division 6, and we have had the explanation, do the senators have any questions?
If not, then the chair will recognize that Division 6 has been fully explained, and to the witnesses, our public servants, thank you very much for your presentation.
Now we will move on, honourable senators. This will be part 1, tab A of your binder. Amendments to the Income Tax Act and to related legislation, clauses 2 to 34.
The amendments to the Income Tax Act and to the related legislation, it's part 1 of Bill C-44, tab A in your binder, clauses 2 to 34.
The witnesses before us are James Greene, Senior Advisor, Tax Policy Branch, Department of Finance Canada; Pierre Leblanc, Director, Personal Income Tax Division, Tax Policy Branch, Department of Finance Canada; and Trevor McGowan, Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada.
At this time I will ask Mr. McGowan to make a presentation and explain clauses 2 to 34 and then senators will ask questions.
Trevor McGowan, Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: I will go through each of the measures in order of the topic, but as I go, I'll provide the clause numbers in the bill. They are not organized by measure, rather by the order in which they appear in the Income Tax Act, which is a somewhat large statute. I have a handy chart that can be provided to the members of this committee, if they would like, just setting this information out, after this hearing.
The first measure in Part 1 — and this relates to income tax amendments — relates to veterans' amendments. It's a purely consequential amendment relating to something where the substantive amendments are in Division 12 of Part 4 of the bill, which replaces the Family Caregiver Relief Benefit relating to veterans with the new Caregiver Recognition Benefit. The Family Caregiver Relief Benefit was non-taxable. This amendment ensures that the Caregiver Recognition Benefit would also be non-taxable.
That is in clauses 2, 16 and 29 of the bill.
Many of these amendments are in the context of the tax expenditure review. This is one of them. It relates to child care spaces and the elimination of the investment tax credit for child care spaces. This is a 25 per cent tax credit with a maximum amount of $10,000, so it facilitates spending of up to $40,000 available for employers providing child care spaces for their employees. This measure was considered not to be very effective in terms of getting child care spaces for children, and it is in the context of an additional $500 million per year announced in Budget 2017 on spending on early learning and child care. We would apply for the expenditures made on or after budget day, but for any agreements entered into before budget day, in order to provide transitional relief, they would have until 2020 to carry out the work.
Next is the elimination of deduction in respect of home relocation loans for employees who get loans from their employers. The difference between a commercial rate of interest and any lower rate of interest charged on these loans is employment benefit, included in income, for these eligible home relocation loans, and an offsetting deduction was provided up to a loan of $25,000. This went largely toward higher-income individuals and was considered to be unfair. It would be eliminated for the 2018 and subsequent taxation years.
That is found in clauses 5, 8, 10, 21 and 22 of the bill.
The next measure would eliminate the tax exemption for non-accountable allowances paid to members of the legislative assemblies and certain municipal officers that would be effective January 1, 2019. The important thing is it is for non-accountable allowances. Of course, as is the general rule, allowances or any reimbursements that require a receipt or some sort of accounting would remain tax exempt, as is the case with all employees. For example, if you take a taxi from the airport to your hotel on a business trip, you turn in that receipt, get reimbursed, and that's non-taxable. That would continue to be the case for the affected members of legislative assemblies and municipal officers.
That is in clause 6 of the bill.
Next is the tax exemption for insurers of farming and fishing property, certain insurers, farming and fishing properties, or qualified ones, but not all insurance providers to farmers have a tax exemption on their income from the insurance of these farming and fishing properties. This is a departure from the normal neutrality principles, and the tax exemption would be eliminated for taxation years that begin after 2018; so from January 1, 2019, onwards.
That is in clauses 7, 24 and 33 of the bill.
Next is the elimination of the additional deduction for gifts of medicine. In this case, this is an additional deduction provided beyond the existing deduction available to all corporations where you get the fair market value of property donated to a charity, you get a deduction for that. This is an additional deduction for corporations making donations of eligible medicines to qualifying charities. That was found to be ineffective in terms of incentivizing donations, and it would be eliminated in respect of gifts made after budget day, after March 22, 2017. The normal rules providing a deduction equal to the fair market value of gifts or donated property to charities would continue to be available to these corporations.
That is in clauses 9, 25 and 32 of the bill.
The next measure is the consolidation of caregiver credits. It replaces the existing caregiver credit, interim dependent credit and family caregiver tax credit with one new Canada caregiver credit. It's primarily a simplification measure putting three sometimes inconsistent and somewhat complex programs into one new one. It also involves more generous outlays of $310 million up to 2021-22. That starts in 2017-18 of $50 million a year, and by 2020-21 it goes up to $65 million a year. It is not purely a simplification measure. It does provide more generous expenses.
That can be found in clauses 11, 12 and 14 of the bill.
The next measure is the elimination of the public transit tax credit. That would be in respect of transit use starting July 1, 2017. This credit was found to be ineffective in terms of meeting its stated goal of increasing transit ridership, and the changes in the context of announced additional spending on public transit in Budget 2017, I believe it was $20.7 billion over 11 years.
That can be found in clauses 13 and 20 of the bill.
The next change relates to the medical expense tax credit and what constitutes eligible expenditures. It would expand eligibility for the medical expense tax credit for expenses incurred in order to conceive a child, to cases where the medical expenditure is not required because of an underlying medical condition, but it is still undertaken in order to conceive a child. One example of that might be for same-sex couples. To be eligible for the medical expense tax credit one could be certified by a doctor.
That can be found in clause 15 of the bill.
The next change is the disability tax credit. To be eligible, one must be certified by either a medical doctor or one of a number of listed specialists. This would add nurse practitioners to the list of people who could certify eligibility for the disability tax credit. For many Canadians, including those in rural and remote communities, nurse practitioners are their primary source of contact with the medical system.
That is contained in clauses 16 and 17 of the bill.
The next change relates to the tuition tax credit. It extends eligibility for the tuition tax credit to occupational skills provided at post-secondary educational institutions. Currently, there are two silos or systems for these tuition tax credits. One is you can attend post-secondary courses at a post-secondary institution, at a university, for example; the other is you can take jobs skill courses, like a second-language course, at a qualifying educational institution. But if you take one of those jobs skills courses at a university, under the current rules, you can't get the credit. Even though job skills courses qualify in one system, the universities qualify in the other. This would allow these skills courses provided by the university to qualify for the tuition tax credit.
That can be found in clauses 18 and 19 of the bill.
The next measure extends the mineral exploration tax credit for an additional year in respect of agreements made until March 31, 2018. This credit supports certain grassroots mineral exploration, and it allows investors in flow- through shares, which allow resource companies to raise tax-assisted funds and renounce certain qualifying expenses to their investors, where their investors can get in respect of this grassroots mineral exploration an additional 15 per cent tax credit. The extension will promote qualifying exploration to the end of 2019.
That is in clause 23 of the bill.
The next is the elimination of the 10.5 per cent surtax on profits from the manufacture of tobacco or tobacco products in Canada. This applies to Canadian manufacturers, not abroad, and it is in the context of the increase you will hear about later in the tobacco excise duty rates. It levels the playing field between Canadian and non-resident firms and maintains the level of taxation through an adjustment to the excise duty rates.
The income tax side of that can be found in clauses 26 and 27 of the bill.
The next part relates to the provision of T-4 information slips by employers to their employees. It would allow employers to provide T-4 information slips to their employees in electronic format as the default without first obtaining consent from the employees. However, this is subject to three important protections for employees. The first, of course, is that appropriate privacy safeguards have to be in place; second, it must be reasonable to expect that the employee would be able to access the T-4s electronically, so if they are retired or on leave, then they would have to get their paper copies; and, lastly, if an employee asks for a paper copy they have to be provided with one.
That is in clauses 28 and 31 of the bill.
Lastly, the national child benefit supplement was replaced by the Canada Child Benefit. However, many provinces refer to the calculation of the old National Child Benefit Supplement, or NCBS, in various provincial programs. The variable that contained the old NCBS was left in the calculation of the Canada Child Benefit, though in such a way that it did not affect the calculation of the Canada Child Benefit. That was set to be repealed on July 1, 2017, but in order to give provinces additional time to revise their rules, to no longer refer to the old NCBS, a one-year extension has been provided. It would now be repealed effective July 1, 2018.
That can be found in clauses 30 and 34 of the bill.
That completes Part 1.
The Chair: Thank you.
Senator Pratte: You mentioned that the investment tax credit for child care spaces was eliminated because the program was not effective. How did the department come to that conclusion? I suppose you have statistics as to the number of spaces that were created or not created?
James Greene, Senior Advisor, Tax Policy Branch, Department of Finance Canada: On average, over the period from 2011 to 2015, approximately 15 taxpayers claimed the credit each year. The aggregate fiscal cost of credits was less than $200,000 per year.
Senator Pratte: That is 15 companies because obviously that was a program for companies?
Mr. Greene: That is right.
Senator Pratte: Fifteen companies claimed the credit per year?
Mr. Greene: That is right. It is also available to unincorporated businesses as well. Yes, it was a very small take-up essentially, even though it was a relatively generous credit at 25 per cent of the eligible costs.
Senator Pratte: As far as the transit tax credit, again, what sort of data was used to measure that? Some of the comments made after the budget by, for instance, the Toronto Transit Commission seemed to mention that their statistics showed that there was an impact on the number of customers.
Pierre Leblanc, Director, Personal Income Tax Division, tax Policy Branch, Department of Finance Canada: As Trevor mentioned, in the course of the tax expense review and assessing the effectiveness of the public transit tax credit, we looked at a number of studies by researchers that evaluated the effectiveness of the Public Transit Tax Credit. These are outside studies that have evaluated the effectiveness of the Public Transit Tax Credit. One of the main ones we looked at was a recent one by two researchers, Rivers and Plumtree, who looked at not only the effect of the credit but other factors that might affect public transit use, such as income, age, distance to work and whether one is employed. They found that the impact of the credit itself across Canada was extremely limited. Depending on the way they estimated, it was an increase of between a quarter of a percentage point and 1 percentage point.
Our assessment is that for a tax credit that costs over $200 million a year and where the stated goal is to increase public transit use, that is it not enough.
Senator Marshall: Mr. McGowan, as you were speaking, I was following along with the book that shows the cost of the benefit or cost to government.
You just answered Senator Pratte about public transit, and I can see that one. Then someone asked the question about the investment tax credit for child care spaces. That shows all nil cost or nil benefit to government or the taxpayer, based on what Mr. Green said. But for some of them, it shows either a net cost or net benefit to government, but then in a particular year, there is nothing. The billed basis accounting — I don't think we have done that one yet — but for most years, it shows it is a benefit to government, but then there are two years where it is not a benefit or a cost to government.
Can you explain that? Is it that the amounts are negligible or . . . ?
Mr. McGowan: You are absolutely correct. Thank you for your comments. The billed basis accounting amendments are not in this bill.
It depends upon the measure. For example, the first one that meets the criteria you mentioned is the Mineral Exploration Tax Credit. I will provide a bit of context for that. The credit itself is being extended for one year. The credit on expenses is announced on an agreement up to the end of March 2018, then the credit would cease to be available. That is why it is an initial additional cost, and that is the cost of the credit.
Another part of the mechanism for the super flow-through share for mineral exploration is that the amount of the credit is brought into income in the next year, so you are taxed on it. That is why you have an increase in governmental revenues for the next year. I would not be in the picture for 2019-2020 or subsequently.
Senator Marshall: Thank you very much.
[Translation]
Senator Forest: I would like to go back to the measure that eliminates the tax credit on public transit.
The city of Toronto, as an example, is a large city in which the profile of users, in comparison to users in medium- sized cities, may be different, because it is made up of a class of Canadians with more financial means than people in smaller cities. With costs in the order of $225 million, the government's objective is to encourage increased use of public transit and to reduce greenhouse gas emissions. But it is also to support Canadians who are less well-off economically.
Did your analyses consider the difference in those two user profiles: the one in large centres that is significantly different from the one for users in medium-sized cities? More citizens are economically disadvantaged in medium-sized cities, which is not necessarily the case to the same extent in major cities.
In addition, medium-sized cities without a public transit company have to spend a lot more money in order to pay for the entire cost of transportation. Users pay about 32 per cent of the costs and there are few federal and provincial government programs available to help those cities in providing public transit services.
Mr. Leblanc: We certainly considered the differences between large, medium and small cities. Since this is a national credit, our evaluation determined that, overall, there was no major effect on the use of public transit.
Of course, we want to consider populations in difficult situations, but since this is a non-refundable credit, it means that, for low-income people who do not have enough money, their income is too low for them to be paying tax. Therefore, they cannot take advantage of this tax credit. The credit has no value for them, which is another factor we considered.
For small cities, the government's approach is to make significant investments that are directly linked to public transit infrastructure. My impression is that it will benefit the entire country, but others can talk more about those investments. Earlier, Trevor mentioned more than $20 billion in investments over 11 years. So it's a very significant investment.
You also talked about the effect on greenhouse gas emissions. In terms of the cost of this credit, $200 million, studies show that, for each tonne of greenhouse gases, it will cost thousands of dollars with this instrument to reduce greenhouse gases. If you draw a comparison with other ways of reducing greenhouse gas emissions, you see that this is a very expensive instrument for that purpose.
Senator Forest: On the one hand, we are eliminating a tax credit for public transit and on the other hand, we are extending a tax credit for mining exploration. In terms of public perception, that is going to be quite the public relations job.
The Chair: I gather that was a comment, not a question.
[English]
If there are no further questions, we will move to Part 2. To the officials, thank you for your information. Part 2 is the amendments to the Excise Tax Act, GST/HST measures.
[Translation]
We now ask Pierre Mercille to introduce himself. He will be providing us with the details.
[English]
We will then move to Part 2, tab B, which is "Amendments to the Excise Tax Act, GST/HST Measures.''
[Translation]
You'll find this information in tab B of your binder, in Part 2, under the heading "Amendments to the Excise Tax Act.'' These are the GST/HST measures, in clauses 35 to 41.
Here to present them is Pierre Mercille, Senior Legislative Chief, Sales Tax Division, Tax Policy Branch. Welcome.
[English]
With that, I will ask Mr. Mercille to give his presentation and explain to us clauses 35 to 41.
[Translation]
Mr. Mercille, the floor is yours.
Pierre Mercille, Senior Legislative Chief, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Thank you. As you mentioned, Part 2 of the bill implements measures dealing with the goods and services tax and the harmonized sales tax.
[English]
The first GST/HST measure restores the GST/HST-free treatment of the drug Naloxone when it is supplied without a prescription for emergency use to treat opioid overdose outside hospital settings. This measure, generally, came into effect on March 22, 2016.
The second GST/HST measure amends the definition of taxi business. Under the GST/HST, all taxi drivers and operators are required to register for the GST and charge tax on their fares regardless of their level of sales. These rules, which have been in place since the inception of the GST, ensure that all taxi operators are treated the same way.
Commercial ride sharing services facilitated by Web applications that provide passenger transportation services that are similar to taxi services. However, such ride-sharing services may not be required to be subject to the same GST/ HST rules as taxi businesses because their services may not fall under the current definition of taxi business under the Excise Tax Act. To ensure that the GST/HST applies consistently to taxi services and ride sharing services, the definition of taxi business is amended to require providers of ride-sharing services — meaning the independent drivers/ operators — to register for the GST/HST and charge tax on their fares in the same manner as taxi drivers and operators.
This amendment will be effective as of July 1, 2017.
The last measure in Part 2 of the bill repeals the GST/HST rebate available to nonresident individuals and nonresident tour operators for the GST/HST payable with respect to the Canadian accommodation portion of eligible tour packages. This rebate is complex. It's costly to administer and only benefits a narrow segment of the Canadian tourism industry. Therefore, it was considered an inefficient tax measure. This repeal will generally apply with respect to the supply of tour packages or accommodations made to non-residents after March 22, 2017, which is the date of Budget 2017. However, as a transitional measure, the rebate will continue to be available with respect to supply of tour packages or accommodations made to non-residents after March 22, 2017, but before January 1, 2018 if all the considerations for the supply are paid before January 1, 2018.
[Translation]
That concludes my description of the three GST/HST measures in Part 2 of the bill.
The Chair: Thank you very much, Mr. Mercille. We now have a question from Senator Marshall, followed by Senator Pratte.
[English]
Senator Marshall: I have a general question. Is it correct that the government estimates taxi and ride sharing services will collect $3 million in fiscal year 2017-18? I want to make sure that I see the correct numbers and that I am interpreting them correctly.
Mr. Mercille: Yes, but you have to recognize that this will not be a complete year because of the coming into force on July 1, 2017. I guess 2018-19 is a better annual estimate because then it will be for $1 million.
Senator Marshall: That is why it is only 75 per cent. Thank you.
[Translation]
Senator Pratte: In terms of applying the GST/HST to this new sector of the taxi industry, do you foresee any particular challenge in doing so? This is a new category of people, whose incomes fluctuate a great deal; will they be more difficult to track and to identify? If so, do you foresee any particular measures to monitor this new segment of the industry?
Mr. Mercille: My first comment is this. One of the reasons why the coming into effect was set on July 1, 2017, rather than the day after the budget, is that the drivers providing these services have to register with the Canada Revenue Agency, or with Revenu Québec if they are in Quebec.
We wanted to give CRA some time to be able to issue public documents so that it is easier for those drivers to register. Some people will be providing services full-time, while others will be doing so part-time. It is the same as in the taxi industry. That is why there are a lot of publications and a lot of information for taxi drivers. CRA also wants to update that information to include drivers providing ride-sharing services.
Senator Pratte: Do you know how the potential revenue to be generated was evaluated? Because the $4 million figure shown is pretty modest.
Mr. Mercille: Since I am more in the legislative area, I am no expert in quantitative analysis. However, I think the Toronto region had a little more data available. An extrapolation was done in terms of the places where those services could be provided in the rest of Canada, because the services are not available everywhere. But more and more companies are providing competition to the company that is best known.
Senator Pratte: And that shall remain nameless here. How does the penalty system work if a driver refuses to register?
Pierre Mercille: The same system of penalties applies to everyone registered for the GST. If they do not pay the tax, they are going to have to pay what they owe, plus interest, because they will not have sent in the money on time. There is also a penalty that may apply if a declaration is not made.
Senator Pratte: Thank you very much.
[English]
Senator Woo: Thank you for your testimony. I am asking this question on the rebate for tour package accommodations for non-residents. I am asking it in part on behalf of my British Columbia colleague Nancy Greene Raine, who has a special interest in this issue.
To clarify, the transition period you say will extend to tour packages that are fully paid up before the end of 2017. Does that mean that they are fully paid up for just the accommodation portion of the tour package or does the whole tour package have to be paid This is a bit of a technical detail.
Mr. Mercille: First, two situations are possible. I can be a non-resident tourist who buys a tour package from a Canadian provider of a tour package. I can also be a non-resident who packages tour packages in Canada, but I do that outside Canada for my clients outside of Canada. In that situation, I'm only purchasing the accommodation portion, and I'm going to purchase bus services and all sorts of other services — sightseeing, guided tours and all sorts of things — from individuals, and I'm packaging the tour operator.
In the case of the accommodation, the payment of the consideration is just for the accommodation. When a non- resident buys a tour package, I have to pay the full tour package before January 1, 2018.
I just want to emphasize that these are for the supply of tour packages that are made after the budget date this year where there is a transitional rule that extends. But the rule says that all the tour packages that have been supplied before budget day continue to be eligible for the rebate.
In terms of the GST legislation, generally, a supply is made when the agreement is entered into, not when the consideration is paid. So if the person signed the agreement in 2018 — say for a tour package for British Columbia — and posted a deposit or something, they will continue to be eligible for the rebate because the agreement was entered into before the announcement in the budget.
Senator Woo: To reiterate, my understanding is that if the tour package was entered into before budget day, Budget 2017, even if it wasn't fully paid for, it would still be eligible for the existing rebate. When the tourists arrive in the middle of 2018 to carry out their tour, they would still be eligible for the rebate under the existing rules. Is that correct?
Mr. Mercille: Yes, because the supply was entered into before the budget date.
[Translation]
The Chair: I would like some more clarification on this measure. In the definition of a taxi company, what is the explanation for the GST and HST small supplier rule not applying to taxi companies or ride-sharing services? Can you explain the reasoning and give us some clarification about the measure proposed?
Mr. Mercille: The proposed measure does not affect traditional taxis because they are already covered by the definition of a taxi service. The intent of the amendment is to put ride-sharing services and taxi companies on an equal footing. Why are taxi companies not subject to the small supplier rule? Because, in general, people who earn less than $30,000 per year are not required to register for the GST/HST. They can do so if they wish, but they are not required to.
Those regulations have been in existence since the GST was established. The goal of this measure was to simplify the procedure and to have all taxi drivers treated in the same way. With taxi companies, rates per kilometre or rates per hour are regulated by provinces or municipalities. We wanted to make sure that, registered or not, people have the same amount in their pockets, given the fixed rates. The provinces know that taxes apply on the regulated rates for using a taxi.
The Chair: So small suppliers are earning less than $30,000 can choose whether they want to register for a GST account or not?
Mr. Mercille: It does not affect taxi drivers and, in the near future, it will not apply to ride- sharing service providers either. The measure applies only to other businesses.
The Chair: Thank you very much for your presentation, Mr. Mercille. We now move to part 3.
[English]
Part 3 is found at tab C. It contains amendments to the Excise Act, the Excise Act, 2001 and the Economic Action Plan 2014 Act, No. 1, clauses 42 to 67.
[Translation]
We are privileged to welcome Gervais Coulombe, Chief, Sales Tax Division, Tax Policy Branch, Department of Finance Canada.
[English]
Thank you for accepting our invitation. Please explain to us clauses 42 to 67.
[Translation]
Mr. Coulombe, the floor is yours.
Gervais Coulombe, Chief, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Thank you very much. Honourable senators, I am here this morning to provide you with some explanations on the two excise matters in Budget Implementation Act, No. 1. The first measure deals with tobacco taxation, details of which are found in clauses 45 to 48, 51, 54, 58 to 63, and 66 of the bill.
[English]
In conjunction with the repeal of the tobacco manufacturer surtax under Part 1 that was explained by my colleague Trevor McGowan earlier today, Budget 2017 proposes to adjust the rates of the tobacco excise duty to ensure that the peak level of revenues collected under the surtax in the early 2000s will be collected under the excise duty framework. For example, the excise duty rate on cigarettes will increase by about 53 cents per carton of 200 cigarettes, namely from $21.03 to $21.56 per carton. The average retail price for a carton of 200 cigarettes is about $104. Similar increases will be made to other tobacco products as well.
To ensure that the increase is applied in a consistent manner to all cigarettes at different trade levels, an equivalent inventory tax will also apply to inventories of more than 30,000 cigarettes held by manufacturers, importers, wholesalers and retailers as of the end of budget day.
[Translation]
All these measures have been in effect since March 23, 2017, the day after the budget was brought down. The proposed change to the tobacco tax will generate about $55 million in additional revenue for the financial year 2017- 2018. The second measure that I would like to discuss with you deals with taxation on alcohol in the form of excise duty. You will find the proposed amendments in clauses 42 to 44, 49 and 50, 52 and 53, 55 to 57 and 64 and 65 of the bill.
[English]
The budget proposes to increase excise duty rates on alcohol products by 2 per cent and to automatically adjust these rates to account for inflation on April 1 of every year, starting in 2018. The government generally applies an excise duty on alcohol products, such as beer, wine and spirits, that enter into the Canadian duty-paid market. Alcohol excise duty rates were effectively last increased in the mid-1980s; therefore, their effectiveness and real value has eroded over time.
In 2017, the proposed measure represented an increase in excise duty of 5 cents per case of 24 bottles of beer from about $2.56 to $2.61 per case. Fewer than 1 cent per bottle of wine from about $0.465 to $0.4725, so 47 cents, basically, and 7 cents per typical bottle of spirits, where the federal excise duty increases from about $3.51 to about $3.58 based on a bottle of 750 millilitres of spirits at 40 per cent alcohol per volume.
This proposal will generate about $13 million in additional revenue in 2017 and 2018.
[Translation]
All these measures have also been in effect since March 23, 2017, the day after the budget was brought down.
This concludes my preliminary remarks on Part 3 of the bill. I am ready to answer your questions.
[English]
Senator Marshall: Thank you very much for your presentation. I haven't had a representation regarding the changes on the tobacco taxation but lots on the alcohol taxation. When I look at the estimates for the revenue it is expected to generate, the tobacco taxation is trending downward, but the alcohol taxation is trending upward. Does past history show fewer taxes being collected on tobacco and fewer people smoking? Why is one trending down and one trending up?
Mr. Coulombe: Thank you for the question. For tobacco, you have a general trend in Canada over the last 30 years of fewer smokers. This is the reason why the department applies a downward adjustment factor for these revenues going forward in the future.
For alcohol products, depending on the products, I think some specific products might be less consumed over time. Others are increasing. Overall the amount is slightly increasing over time. The proposed measures, as I mentioned in my presentation, include automatic indexation of alcohol excise duty rates going forward. For instance, if the inflation is 1.5 or 1.3 per cent in this fiscal year, the rates increase by an equivalent percentage as of April 1, 2018. As a result, the department had to include forecasted future revenues based on future increases in the consumer price index.
Senator Marshall: I don't know if this is a fair question to ask you, but I'll ask it anyway. Was the impetus to the changes in the tobacco and alcohol taxation health concerns, or was the impetus to generate revenue for the government?
Mr. Coulombe: For the tobacco measure, as explained under part 1 by my colleagues, the first impetus was to get rid of the surtax. That was deemed an ineffective way of indirectly taxing tobacco. The surtax applied only to domestic tobacco manufacturers, whereas more than half of the Canadian market today comes from imported products. So these products were not subject to the surtax and have not been subject to the surtax for many years. The impetus was more to remove that surtax.
Governments have tried to keep the overall tax burden on tobacco products stabilized over time. You may remember, when the GST was reduced from 7 to 6 and then from 6 to 5, the tobacco excise duty rates were adjusted upward. It's part of the idea of maintaining the tax burden over time for health reasons.
For the alcohol measure, the main driver is to have a 2 per cent adjustment upward —this is a policy decision — and going forward, ensuring that these rates follow the inflation that is expected and that arises on other goods. Excise duty rates, by nature, are presented, as you may see in the budget documentation, in a fixed amount per given unit of alcohol, for instance, of beer, wine and spirits. As a result, if these rates are not indexed from time to time, they erode and they lose their value. That was the main driver behind that measure.
Senator Marshall: The producers of alcohol, they acknowledge an increase in price, but they really don't like the CPI, having the tax indexed. Thank you very much.
Senator Woo: Thank you, Mr. Coulombe, for your presentation. Can I ask you to give us a sense of the federal excise on alcohol relative to other government levies and taxes and excise duties on alcohol? I know it varies from province to province, but if you could give us a sense of the relative importance of the federal take through taxes and alcohol.
Mr. Coulombe: Thank you for the question. According to the Public Accounts of Canada, the federal government collected about $1.6 billion in excise revenue duties on alcohol for the fiscal year that ended March 31 this year. Collectively, provinces and territories generate more revenue, at least four times more, so more than $7 billion.
Usually provinces and territories use markups. Some of you may be aware of the LCBO and the SAQ on the Quebec side. They are state monopolies at the retail level, and as part of their price structure, because they determine the final price of the goods they put on their shelves, they may use various markups, often computed as a percentage of the cost they have paid on these products.
I don't know if this answers your question for the order of magnitude one to four.
Senator Woo: One to four, roughly, depending on provinces.
Mr. Coulombe: Yes.
Senator Woo: I want to get back to the question of the escalator raised by Senator Marshall and the logic of the escalator.
The logic of the escalator for tobacco is clearly health. Therefore, you want to maintain a certain deterrent effect, I guess, by making sure that as prices go up, your excise tax on tobacco goes up as well.
I haven't fully heard the logic for the escalator on alcohol. Perhaps you can help us by explaining if there are escalators used on other excise taxes or other taxes and what the logic is behind those escalators.
Mr. Coulombe: The underlying logic goes back to inflation. Excise duties are a fixed amount based on a particular quantity of volume. As a result, they do not adjust to inflation over time. One dollar in 1980 does not have the same value as one dollar today.
The main logic of this measure, in the way it has been presented, is now we want to ensure, going forward, we have in place a mechanism that is similar to the one used, for instance, in the Income Tax Act, in respect of various thresholds.
Senator Woo: Brackets.
Mr. Coulombe: Brackets there. You have many amounts that are adjusted to account for the Canadian price index, the general index, of course, of inflation.
As for the mechanics here, we have duplicated the model that was developed for income tax purposes in 2014. That model was introduced in the Excise Act 2001 to ensure periodic adjustment of tobacco rates, and now in this very budget, the government has decided to implement these mechanisms in respect of the excise duty on alcohol products.
Senator Woo: If the escalator is put in place and if over time inflation gets back to more normal or even abnormally high rates, there will be a discrepancy between the excise tax levied on products that are imported because some domestically produced alcohol products are exempted from the excise tax, for example, VQA. Do you think there is a possibility that the gap could become sufficiently large to warrant a trade action from countries that export to Canada?
Mr. Coulombe: It's very difficult for me in my position to elaborate or to speculate on future inflationary adjustments. But if we look at inflation in recent years, the target from the Bank of Canada is still 2 per cent, I think. We looked at the very recent inflationary adjustments and we're less than 2 per cent. From my reading of newspapers, I do not expect to have huge inflationary adjustments in the near future.
Of course, there is nothing that prevents the government and Parliament from acting in future years, should inflation be rising above the expected levels.
Senator Woo: Thank you.
[Translation]
Senator Moncion: Have any calculations been done, have the effects of the "escalator'' clause on alcohol been evaluated, in relation to the American market and the European market? What effects will it have? For example, will it put our alcoholic products out of line in relation to the markets with which we compete, or with import markets?
Mr. Coulombe: Thank you for your question. As for Canadian exports to European, American or world markets, we have to remember that exports are exempt from excise duty. We know that Canada's production of spirits is, to a large extent, an export industry, in terms of the industry's overall percentage. Excise measures will have no impact on its competitiveness on international markets. As for alcoholic products imported into Canada, the excise duty on imports is essentially the same as the one on domestic products, subject to two credits, two special programs, for wine. So, with wine made in Canada with 100 per cent Canadian grapes, the 47 cents per bottle that I mentioned earlier does not apply.
As for Canadian beer, I believe that Canadian brewers benefit from reduced rates on the first 75,000 hectolitres, or 75 million litres, that they brew. For example, a very small microbrewer, brewing less than 2,000 hectolitres of beer annually, pays only the equivalent of 10 per cent of the general rate. Imported beer is subject to the full amount of excise duty, just like wine, spirits and everything else.
Senator Moncion: Where is the annual inflation clause you mention going to be applied?
Mr. Coulombe: To all the rates, both the reduced rates for small brewers in Canada and the general rates of excise duty on imports to or production in Canada. All those rates are subject to the inflation adjustments in the measure.
Senator Moncion: Would it be easier to pass the cost on to the consumer?
Mr. Coulombe: Here it is on the person who has the right to manufacture or to import. The payment can be delayed until the state and provincial monopolies take their products out of the excise duty. We are actually greatly reducing the number of people who have to pay the duty by imposing it higher in the distribution chain.
Senator Pratte: I have two small points of clarification to ask you about. Earlier, you gave the impact on spirits as an example, but, although it interests me greatly, the impact on beer escaped me.
Mr. Coulombe: It is 5 cents per case of 24.
Senator Pratte: Meaning two dollars and what? You gave some examples.
Mr. Coulombe: The exact figure at the moment, before the 2017 budget, is $2.56 per case of 24 normal 356 ml bottles. As an example, that will now be $2.61.
Senator Pratte: For a case of?
Mr. Coulombe: Twenty-four bottles.
Senator Pratte: When you did your forecasts of the revenue to be generated by this tax increase, did you factor in any impact on demand?
Mr. Coulombe: Not at all.
Senator Pratte: Because you feel that there will be none?
Mr. Coulombe: With inflation at 2 per cent, especially since this future measure is based on inflation, all prices go up and salaries increase. No estimates were made because the effect was considered too small to have an impact, especially because the 2 per cent is being applied to a component that is already very small in relation to the final price of the project to the consumer. It is not an increase of 2 per cent on the final price, it is an increase of 2 per cent on the excise duty. As with the example of the bottle of wine, it is only a matter of rounding. We were at 47 cents because we were rounding up, and we are still at 47 cents because we are now rounding down.
Senator Forest: Thank you for those explanations. I am concerned about the new microbrewing firms that are popping up in Canada, but the tax also concerns me a lot in terms of spirits. Let me give you an example: the best gin on the market these days is called St. Laurent Gin. It is produced in Rimouski. At the SAQ, it sells for $48 a bottle, even though you can get a major brand for $28. So, with the 2 per cent, this craft gin, like scotch and other products that are much more expensive, is going to absorb — If I compare that to a major brand, there is going to be a much greater impact at retail level that gin from a big distillery. The impact on craft alcoholic spirits is going to be quite significant.
Mr. Coulombe: Thank you for the question. Excise duty is always set by the volume produced not by the value of the product. So, for example, with the gin you are telling me about, at 40 per cent alcohol by volume, because the taxation rate for spirits applies to the pure alcohol, the excise duty on a 350 millilires bottle would be $3.58, as opposed to $3.51 before the budget. The rate of $3.58 per bottle is the same for gin retailed at $25, $50, $100 or $200, just like a bottle of champagne, which has the same excise duty as a bottle of wine.
Senator Forest: It has nothing to do with the quality.
Mr. Coulombe: Other taxes contribute to the full amount. Here, we are just concerned with the alcohol.
[English]
Senator Marshall: Is the indexing of tax something new? Is this a precedent?
Mr. Coulombe: The indexation of excise duties in general is something that is gaining in momentum. When I think of tobacco products, you have best practices that have been presented by many organizations dedicated to health, saying that because of the nature of a fixed excise duty there should be mechanisms to ensure that rates are adjusted over time so they maintain their real value with inflation.
In the early 1980s, there were mechanisms in the federal statute that adjusted some excise duties, but they were not necessarily based on the general consumer price index. So the reference was sometimes based only on the inflation that occurred in respect of alcohol and other products, and there were issues because of a cascading effect.
Senator Marshall: This is something new?
Mr. Coulombe: The mechanism being used here existed in the income tax context and was brought into the excise in 2001 and 2004 for tobacco products and has now expanded under the Excise Act in respect of wine, beer and spirits.
Senator Marshall: The effect of it is that when something is increased in the budget, it comes back every year for scrutiny, but now that it is indexed it doesn't come back for scrutiny every year. It is done automatically.
Mr. Coulombe: That is automatic, yes.
The Chair: Mr. Coulombe, could you please provide the clerk with the rationale for the escalator provision for excise taxes on alcohol in relation to other forms of indexation in the Canadian tax system? This was brought to the attention of the chair.
On behalf of the committee, I thank all the witnesses who participated today — our senior bureaucrats, public servants. Again, you have shown caring, interest and a team approach when it comes to the objectives of the Finance Committee, which is predictability, accountability and transparency.
Honourable senators, thank you for enabling the chair, with its first meeting, to progress through Bill C-44. This morning we completed Parts 1, 2 and 3 and also Divisions 2, 4 and 6.
This afternoon there will be another meeting on this same topic at 2:15 p.m. in room 160-S, Centre Block.
(The committee adjourned.)