Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 29 - Evidence
OTTAWA, Thursday, October 30, 2003
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-21, to amalgamate the Canadian Association of Insurance and Financial Advisors and The Canadian Association of Financial Planners under the name The Financial Advisors Association of Canada; and Bill C-48, to amend the Income Tax Act, met this day at 11 a.m. to give consideration to the bills.
Senator Richard H. Kroft (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, we will begin with the continuation of yesterday's matter on the Advocis merger.
Opening the subject, you will recall that yesterday we ran into some minor complications. I would like to read for the record now the text of an e-mail, which is a legal opinion. It is an e-mail directed to and received by our clerk, from Carol Anne O'Brien of Cassels Brock and Blackwell to Robert Denis, clerk of our Senate committee. The subject is ``CAIFA — French language name.''
I will read as follows:
We've identified the Quebec regulation that contains the ``prohibited terms'' with respect to financial planners. Copies, in French and English, are attached as HTML documents.
Our view, which we are working to have confirmed by Quebec counsel, is as follows:
In Quebec, the Regulation respecting titles similar to the title of financial planner, under An Act respecting distribution of financial products and services(c. D-9.2, r.4) prohibits the use of certain titles other than by persons who qualify in the prescribed manner. One of the prohibited terms is ``conseiller financier.'' On that basis, the French language name, ``L'Association des Conseillers Financiers du Canada'' would be prohibited. However, ``conseiller en finances'' is permitted under this legislation. Therefore, the proposed name, ``L'Association des conseillers en finance du Canada'' would not be prohibited under this regulation.
On receipt, this e-mail was referred to our legislative counsel, and has been accepted as correct and confirmed as acceptable in the view of our legislative counsel. On the basis of that, I would like to return to clause-by-clause. Is it agreed we go clause-by-clause?
Hon. Senators: Yes.
The Chairman: Shall the title stand postponed?
Hon. Senators: Agreed.
The Chairman: Shall clause 1 carry?
Hon. Senators: Yes.
The Chairman: Shall clause 2 carry?
Hon. Senators: Yes.
The Chairman: Shall clause 3 carry?
Hon. Senators: Yes.
The Chairman: Shall clause 4 carry?
Hon. Senators: Yes.
The Chairman: Shall clause 5 carry?
Senator Massicotte: May I propose an amendment, Mr. Chair?
[Translation]
The motion reads as follows:
That Bill S-21 be amended in clause 5,
a) by substituting the following in lines 32 and 33 on page 3:
``by establishing best practices, promoting standards of practice, and encouraging'';
b) by substituting the following in line 15 on page 4:
``to promote and encourage ethical be-''
[English]
The Chairman: Shall the amendment carry?
Senator Kelleher: Yes.
The Chairman: Shall the clause, as amended, carry?
Hon. Senators: Yes.
The Chairman: Shall clauses 6 to 15 carry?
Hon. Senators: Yes.
The Chairman: Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Shall the bill carry as amended?
Hon. Senators: Agreed.
The Chairman: Shall I report the bill?
Hon. Senators: Agreed.
The Chairman: I would now like to turn to the next item on our agenda, which is Bill C-48, to amend the Income Tax Act in respect to natural resources.
I welcome as our witness the Parliamentary Secretary to the Minister of Finance, Mr. Bryon Wilfert. We look forward to your presentation, and then we have additional witnesses on this matter.
Mr. Bryon Wilfert, Parliamentary Secretary to the Minister of Finance: I am pleased to be here today to discuss Bill C-48. My remarks will be brief in order to leave time for any questions.
Bill C-48 implements federal income tax changes for Canada's resource sector that were announced in the 2003 budget. The non-renewable resource sector, as you know, comprises the mining and oil and gas industries. Honourable senators will recall that the 2003 budget also contained other resource-related measures that complement this new regime. Several of these measures were legislated in Bill C-28, the Budget Implementation Act of 2003, which received Royal Assent in June.
For instance, that bill eliminated the federal capital tax, increased the amount of income eligible for the small business rate to $300,000, extended the temporary mineral exploration tax credit until the end of 2004 and provided an additional year for issuing corporations to make expenditures related to these arrangements. Today we are discussing a new structure for the federal income taxation of the resource sector.
The contribution of the resource sector to the Canadian economy is significant. In 2001, for example, it accounted for almost 4 per cent of Canada's gross domestic product, with over $64 billion in exports and more than $30 billion in capital expenditures. As well, over 170,000 Canadians work in resource businesses.
Before discussing Bill C-48, let me take a moment and briefly review the tax measures that are currently in place for the resource sector. Income earned in Canada from the extraction and initial processing of non-renewable resources is subject to a range of sector-specific tax measures. These include provisions relating to the deductibility of exploration and the development expenses, flow-through shares, the temporary 15 per cent mineral exploration tax credit and the 25 per cent resource allowance. There is a proxy for royalties and mining taxes paid to provinces. The sector has also received important benefits from the general provisions — such as the Atlantic investment tax credit.
The resource allowance was introduced in 1976 primarily to protect the federal income tax base from what were then rapidly increasing provincial royalties and mining taxes. They previously had been deductible for federal tax purposes thus lowering federal government tax revenues.
However, the resource allowance was an arbitrary deduction that does not necessarily reflect the actual cost of royalties and explaining taxes. As well, its complexity has resulted in substantial compliance costs for the industry and administrative costs for the government.
Economic conditions have changed significantly since the 1970s, making the original need for the resource allowance much less relevant today. In today's economic environment, there is greater pressure on producers to be efficient and on a host of jurisdictions to levy royalties and competitive raids rates.
When the government was designing the new tax structure for the resource sector it was guided by three main goals. First, the tax regime must be internationally competitive, particularly in North America. Second, it must be transparent for firms and investors. Third, it must promote the efficient allocation of investment both within the resource sector and between sectors of the Canadian economy.
I am confident, Mr. Chairman, that the measures inBill C-48 will help to meet those three goals.
This new regime will ensure that the resource sector firms are subject to the same statutory rate of corporate income tax as firms in other sectors. It will also ensure that these firms can deduct actual costs of production, including provincial and other Crown royalties and mining taxes rather than an arbitrary allowance.
Let me explain further. The first measure in Bill C-48 reduces the federal statutory corporate income tax rate on income earned from resource activities from 28 per cent to 21 per cent by 2007. This rate is important because it is often the first piece of information viewed by prospective investors. When the rate was reduced to 21 per cent for most large businesses under the government's tax reduction plan, the lower rate did not apply to resource income. For the past several years the government has consulted on options to extend the lower corporate income tax rate of 21 per cent to resource income, at the same time as improving the tax structure.
For Bill C-48, this will be achieved. A uniform, low statutory rate will send a positive signal to investors in Canada and internationally about Canada's relative competitiveness. At the same time, it will reduce compliance and tax administration costs.
A second measure in the bill eliminates the arbitrary resource allowance and provides a deduction for the amount of provincial and other Crown royalties and mining taxes actually paid. Projects will now be treated in a more comparable fashion. This change will promote efficiency by ensuring the investment decisions are based more consistently on the underlying economics of each project. It would also result in a simpler tax structure, streamlining tax administration and compliance.
A third measure introduces a new 10 per cent minimal exploration credit. This credit will apply to both Canadian grassroots exploration and pre-production development expenditures for diamonds, base or precious minerals and industrial minerals that become base or precious metals through refining.
The first two measures will be phased in over five years. The new tax credit will be phased in over three years. The schedule will provide a reasonable transition to an improved tax structure in a fiscally responsible manner.
This package is the product of extensive consultation with all parts of the resource sector. Overall, the changes will be positive both for the mining industry and the oil and gas industry.
For a particular firm, the net impact of the proposed changes will depend on several factors including the firm's mix of projects, financing structure, the amount of capital tax paid and the size of tax pools carried forward from previous years. The 10-per-cent minimal exploration tax included in Bill C-48 is also important in this regard. Mining companies that are investing in Canada, by actively exploring for or developing new mines will benefit from this credit.
In assessing the overall impact of federal tax changes for the resource sector, it is important to take into account all the elements of this package, including the new mining exploration credit as well as the elimination of the capital tax, which some analysts have ignored. Cumulatively, these measures will substantially reduce effective tax rates for both the mining and oil and gas industries.
This reverses a current disadvantage relative to the United States. For mining, it builds on an existing advantage. In both cases, the changes place the Canadian resource sector in a markedly improved position to attract capital for exploration and development.
I want to remind honourable senators that we are discussing federal tax changes today. To the extent that provinces rely on federal tax base, if offsetting adjustments are not made, provincial income tax revenue from the federal resource sector may in some cases increase as a result of these changes.
As honourable senators know, each province must make its decisions accordingly. However, the international competitiveness of Canadian firms will be maximized where provinces provide a mechanism to return to the industry any provincial revenue gain arising from the changes to the federal tax structure.
Some people may ask whether the measures in this bill are consistent with Canada's Kyoto commitment to reduce greenhouse gas emissions. They are completely consistent.
These changes will treat investment more consistently, both across resource projects and between the resource sector and other sectors of the economy, including the renewable energy sector. This will ensure that the economic activity is allocated according to underlying economic factors. The oil and gas and mining industries will be called upon to play their part in implementing Canada's Kyoto commitment. They will make a significant contribution to a 55-megaton reduction target to the large final emitters program.
Renewable energy initiatives are also a key part of the government's Kyoto response. The budget in 2003, for example, allocated an additional $2 billion over five years to support alternative energy technologies that help reduce greenhouse gas emissions. It also supported renewable energy through tax measures such as an excise exemption for certain alternative fuels and provision of accelerated tax depreciation for additional types of renewable energy and energy efficient equipment.
Indeed, Bill C-48 itself improves the tax treatment of certain intangible expenditures associated with renewable energy and energy conservation projects. So-called Canadian renewable and conservation expenses are fully deductible in the year that they are incurred and can be transferred to investors under flow-through share agreement.
The change in Bill C-48 will allow a corporation to announce these expenditures to investors in a year, where the actual expenses will be incurred in the subsequent year. This will mean greater flexibility in the timing of investments financed through flow-through shares. The treatment of such investments in such projects will now parallel investments in non-renewable resource projects.
In summary, let me assure honourable senators that the measures in Bill C-48 will improve the competitiveness of the Canadian resource sector, promote the efficient development of Canada's natural resources and simplify the taxation of resource income.
At the same time, they will make both the Canadian mining and oil and gas industries more competitive, which is crucial for the communities that rely on them. These changes reflect the government's ongoing commitment to an efficient and competitive corporate income tax system, which plays an important role in recreating a stronger and more productive economy.
Mr. Chairman, officials from the Department of Finance have joined me here today. We would welcome any of your questions concerning Bill C-48.
Senator Kelleher: Thank you for your attendance and remarks. In your presentation, you discussed briefly the possible impact of provincial legislation on the ultimate effects of this bill. What support do you have from the provinces with respect to this legislation? Has it been discussed with them? What appears to be their attitude towards it? Will they support it? Will they distort it with their legislation?
Mr. Wilfert: The answer is yes. They have been consulted. They have been supportive.
You can imagine that provinces like Nova Scotia and Alberta particularly benefit from this. It is up to the provinces as to how they respond in terms of their tax structure.
In consulting both with the industry in question and with the provinces, there is significant support from provinces such as Saskatchewan because of the nature of some of the industries there that are directly related. It will be up to those provinces, but I assume they would respond in kind because the main purpose of this legislation is to ensure that we are competitive on an international basis, particularly within the North America market. I must say that the consultations went very well.
Senator Kelleher: Could I put it to you a little differently? Did any of the provinces respond in a negative way?
Mr. Wilfert: To the best of my knowledge, no. They have been very positive.
Senator Kelleher: It is the government's hope that — and you express it — new economic activity would be created as a result of this bill. Have you done any studies to that effect, or some forecasts? You must have some reason for feeling that this new bill will be helpful. On what do you base that?
Mr. Wilfert: We base that, senator, particularly on the consultations that we had with the industry that indicated that if certain measures were taken, they would improve the climate for both existing and future development in this sector.
As I said, we received positive feedback. Given the expectations that we had from those meetings, I would say that this would only improve those sectors and the communities that are very much impacted by development in those areas.
Senator Massicotte: My questions are a bit related. Any time you cause in a calculation of taxes payable, a deduction based upon another province's taxes, there is potential for the other party to reduce the federal tax gained by allocating or changing the royalty tax.
When Senator Kelleher was asking the question you were quite confident we would not see changes by the provinces increasing the royalty tax. They could easily increase it and increase their corporate tax rate for a net zero gain but a loss to us. You do not expect that to occur. Is that correct?
Mr. Wilfert: I obviously cannot speak for the provinces but given the thrust of this legislation and the consultations, it would be counterproductive. It would not be reasonable for provinces to do what you suggest.
Yes, I would say that they will work in concert with us so that industry will benefit. It would not make sense for us to do it on one hand and take it away with the other.
Senator Massicotte: We can only applaud when there is a reduction in taxes that is equitable to all stakeholders. You mentioned that one of the reasons is to be competitive in North America. The industry is for the world, not only North America.
We talk about royalties and corporate income tax. Would you mention the tax rates in the States and some South American countries? How do we compare against those?
Mr. Wilfert: Let us take the mining sector. In the United States, Nevada is a major mining state. Their tax rate is 35 per cent. When this legislation fully comes into place, in Canada the tax rate will be 31 per cent. In Alaska the rates are about 41.1 per cent. When this legislation comes fully into effect, the tax rate in Alberta would be 30.1 per cent. The rate in Texas is 35 per cent.
On that basis, we will be significantly lower. There was certainly a positive signal that the industry was very encouraged by that.
Senator Massicotte: I know royalty tax petitions. In a Canadian sense are we competitive compared to other states or countries?
Mr. Wilfert: Relative to other countries in the world, there are many factors besides taxation, as you know, that may determine why countries may receive investment, whether it is Indonesia or Chile. Officials may be able to give comparative figures to you. I do not have those figures in front of me.
However, both in terms of the North America market and our major competitors around the world, yes, we will be well placed.
Senator Tkachuk: Thank you very much. I can only applaud you. Any time you hear about a tax cut, it is good news.
You mentioned Kyoto. You said that you wanted to ensure that we lived up to our agreements on Kyoto when you were initiating this legislation. How would Kyoto affect tax cuts?
Mr. Wilfert: I do not want to cloud the issue. That before you are tax measures. However, I did indicate that firms in the non-renewable resource sector will be subject to the same statutory rate of corporate taxes as other firms in other sectors.
These changes are more consistent with other projects in the resource sector. With regard to Kyoto, the industry is called upon to make a 55-megaton emission reduction target, particularly in the large emitter program. That is direct and very much targeted.
I put this within the context of the budget. As you know, I was here in June and indicated to you that we have made that $2 billion commitment over five years, again to assist those in the alternative fuel industry because people had some concern with regard to the non-renewable sector and the issue of renewable energy. In a two-pronged approached, we are ensuring that the non-renewable sector, particularly in terms of oil and gas, comes through with the 55-megaton emission figure while at the same time providing assistance and promotion of efficient technologies for the alternative energy sector.
Senator Tkachuk: I am not sure how this affects the legislation. You say a 55-per-cent reduction. Are you speaking of the emission levels at the Syncrude project, at the refinery or the use of that energy from emissions for heat or car use? How does that impact this and what does that have to do with some solar energy project?
Mr. Wilfert: That is a good question.
Essentially the 55-megaton emission reduction has to do with the oil sands industry generally. With regard to Kyoto, in the House I was asked about this issue. Again I do not want to diverge to an area that is not the thrust of this bill, but we are telling the industry in the oil sands, for example, what they are required to do.
There are those who say that we may be favouring the non-renewable sector. In the February 2003 budget, we took steps whether in regard to ethanol, the $2 billion commitment over five years for the development of alternative energy sources or accelerated depreciation on the CCA class 43.1. In other words, it was two-track.
However, I do not want to lead you astray and suggest that this bill is somehow directly Kyoto related. Obviously, there are aspects of it that are related, but we are doing it for the non-renewable sector and the alternative energy sector.
Senator Hervieux-Payette: Honourable senators, some people mentioned that the oil and gas industry is doing well, probably among the best in Canada, whereas the mining industry is not doing as well. Why did you put the two together? We know that mining needs some support but why give the same support to a buoyant industry that does not need any help. The mining industry could probably have benefitted from more support. I am trying to understand the logic because of what I see in Northern Quebec, where the mining industry is suffering a great deal. They need a lot of help and we are helping the big multinational in petroleum and gas. I want to know the rationale behind that.
Mr. Wilfert: Mr. Chairman, we are helping both the multinational and the domestic petroleum explorers. I would not want the senator to think we are helping non-Canadians. We are helping the whole sector. The impact, of course, is that the taxation treatment applied to both. We are rectifying something that we recognized and, as I mentioned in my opening comments, that we were committed to doing right. We wanted to have consultation with both sectors. We could have split but we felt that it was important to deal with it as a package because of the nature of the implications on both sectors. Your comment about the oil and gas sector is well taken. We want to continue to have a strong oil and gas exploration sector in this country. In order to do that and as economic circumstances have changed over the years, we want to make sure this is the place to invest, to explore and to benefit all Canadians down the road. That is the rationale.
Senator Hervieux-Payette: I have a short second question. We have received some correspondence from First Nations who have oil and gas operations on their reserves and they are benefiting from the royalties. They say that this measure will cost them $1 billion over the next ten years. I thought that the First Nations were at the core of our agenda; to help them and to ensure that they are self-sufficient. This is one industry with which they are able to sustain themselves. Why do we have a measure that is not tailor-made? I understand your rationale that Canadians and multinationals are covered in the same way. I have never seen any laws in Canada that are not applied to all the partners, except that 80 per cent of our oil and gas industry is in the hands of foreigners — at least multinationals.
We have Petro-Canada and a few others but over the last couple of years, we have lost many to foreign investment. Please tell me why there was no measure to offset some of the losses they might incur unless what they say is wrong. It seems to be well documented and they say that KPMG has made the report. I trust KPMG knows how to calculate royalties.
Mr. Wilfert: Mr. Chairman, first of all, this issue has never been raised in the other place. I have never seen any correspondence to that effect.
Senator Prud'homme: They do not usually —
Mr. Wilfert: We raise so many good questions and I am so beaten that I am well used to it. Let me give you my understanding. Royalties paid by companies to First Nations and to other private resource owners have historically been, and will continue to be, deductible for federal income tax purposes. This bill makes no change to the treatment of First Nations royalties. I want to emphasize that. Under the existing rules, the companies that pay non-Crown royalties, such as those to private-right-holders and First Nations, are able to deduct both the royalty and the resource allowance. Mr. Chairman, other things being equal, such a company may have a tax advantage over one subject to Crown royalties, which are not currently deductible. The resource tax proposal will place all projects, as I said in my opening comments, on an equal footing, and companies will now have a deduction from the actual royalties paid, whether they are paid to the Crown, to First Nations, or to private rights.
In terms of the impact, the whole oil and gas sector has been supportive. I have not seen any correspondence but that would be a thumbnail sketch of my response in terms of the effect.
Senator Hervieux-Payette: The letter filed with the committee was dated June 17 and addressed to John Manley with copies to Mr. Nault, Mr. Martin, Ms. Copps, and the Chiefs of the First Nations. I am quoting from the letter that was provided for our information. They have special treatment that they are losing with these proposed new tax changes. I am asking why we would change a measure that is very beneficial to them, when there are few areas where natives truly have an advantage in their economic weight.
Mr. Wilfert: I will underline: there is no change to the treatment of the First Nations royalties in this bill.
Senator Angus: Mr. Chairman, I understand that we will hear from representatives of the First Nations in a few minutes. Perhaps this witness could stay and answer questions that Senator Hervieux-Payette and I may want to ask thereafter. I have been reading their documentation and they believe that their points of view were not aired in the other place as they would have expected.
The Chairman: Let us facilitate that.
Senator Hervieux-Payette: I will wait for their presentation.
The Chairman: Hopefully Mr. Wilfert will be able to come back.
Mr. Wilfert: Mr. Chairman, my time is somewhat limited and I have limited ability to respond because this issue was never raised in the other place. You are hearing from others; that is fine. I do not respond without having a good grasp of the information, and I do not have that. Any comments that I might give you would be superficial at best.
The Chairman: In the normal course, I would suggest that you follow your schedule, that we hear another witness and that your officials will be here to respond and make that consideration. I only point out that you have the right of rebuttal and that we have, to the extent that we read the newspapers, time constraints. We will deal with those realties. Putting all that fairly before you, thank you for your presentation.
Mr. Wilfert: The officials here are from the Department of Finance. I will stay around for a little bit but the officials will probably be able to answer detailed questions with regard to any issues that are raised.
The Chairman: To be clear, your officials will be available to come to the witness table and answer any direction questions?
Mr. Wilfert: That is correct.
Senator Angus: We will take note of these issues. In the other place they are not up to snuff.
The Chairman: I now invite the representatives from the Indian Resource Council of Canada to come forward and take their positions. We will hear from Mr. Roy Fox, Chief Ernest Wesley, Mr. Larry Kaida, Mr. Doug Rae and Ms. Marilyn Buffalo. Mr. Fox, please proceed.
Mr. Roy Fox, President and CEO, Indian Resource Council of Canada: Honourable Senators, thank you for this opportunity to make a brief presentation at this time. As you mentioned, Mr. Chairman, we do have our chairman with us, Chief Ernest Wesley from the Nakoda Nation. As well, we have our good friend Marilyn Buffalo representing Chief Victor Buffalo of the Samson Cree Nation, our lawyer in this matter, Mr. Rae, and of course my assistant, Mr. Kaida. Also we have in the audience Chief Roberta Jamieson, Chief of the Six Nations, and also member of our board of directors for the Indian Resource Council. She is here today supporting the presentation, as well as Councillor David General from Six Nations.
I would like to ask our chairman to make some opening comments.
Chief Ernest Wesley, Stoney First Nation, Alberta, and Chairman of the Board, Indian Resource Council of Canada:
[Mr. Wesley spoke in his native language.]
Senator Angus: Is Chief Wesley reading this document, the exact same words of this document?
Mr. Fox: No, I understand the chief is making normal opening comments. I cannot say they are the words exactly in this document.
The Chairman: It is our obligation to gather information and there are obviously limitations on our capacity so it is in your hands, however you wish to proceed.
Mr. Wesley: With that, I will go into my second language. I am thanking you for inviting me to speak to you today. I am chief of the Wesley First Nation of the Nakoda Nation. The traditional lands of my people comprise the eastern slopes and the Rocky Mountains of present-day Alberta and British Columbia.
Our reserve lands, which are held in trust for us by the Government of Canada, are located south, west and north of the city of Calgary. You must appreciate that these reserve lands were not of our choosing, and for years we were sad and angry that the missionaries and the Government of Canada had forced us to make our homes on lands that had no agricultural potential. It is no coincidence we were called by the colonizers, ``The Stoney people.''
In recent years, however, we have come to realize that the creator has in fact blessed us. He has placed natural gas deposits under our reserve lands. These reserve lands produce sizeable quantities of natural gas. Companies such as Shell Canada Limited, Imperial Oil Resources Limited, and Petro-Canada Inc. extract natural gas and produce much wealth for themselves and for our people. Through the taxes these companies pay on the revenues earned from this gas production, these companies also produce much wealth for Albertans and for our friends, the newcomers, Canadians.
From this natural gas wealth, my people have learned what benefits we can realize from the market economy. We have come to appreciate the value of the money and the material wealth that it brings. We have learned what it means to be real participants in the Canadian economy. We are using these moneys to stimulate economic development on our lands.
Given what we have learned and the progress we are making, we are therefore disappointed with a new path of the Government of Canada indicated by Bill C-48. We do not feel it is appropriate for the Government of Canada to now embark upon a path that seeks to take away from we, the Nakoda people, some of this wealth that the creator has given us.
It appears that the Government of Canada wishes us to earn a subsistence living, but as soon as we are seen to be making real progress and creating real wealth, then the Government of Canada seeks to put up road blocks and to take away some of this wealth we are seeing for the first time in our lives.
The President of the Indian Resource Council, my former colleague, chief, now president, Mr. Roy Fox, will be addressing the specifics of why we are here today. I must confess that neither Mr. Fox nor myself should have had to appear before you today. Instead, what we are saying to you today should have been said already by Her Majesty's own representatives.
The issues we are addressing should have been addressed in the House of Commons and, failing that, these issues should have been brought to the attention of Parliament by the Honourable Mr. Nault, the Minister of Indian and Northern Affairs.
Mr. Nault is charged with the primary responsibility for fulfilling Her Majesty's obligations to First Nations in Canada. It is in that role that Mr. Nault should have sought the changes that myself and Mr. Fox had to address today.
When the resource allowance was first introduced in the 1970s, Mr. Nault's predecessor at that time spoke up for the interests of First Nations. Mr. Nault should be the one standing up now for the interests of First Nations in the context of the resource allowance proposals contained in Bill C-48.
First Nations are at long last using their oil and gas resources to their economic advantage. We are finally players in the oil and gas industry. Unfortunately, Mr. Nault and the Government of Canada appear to want to halt our progress. This is very unfortunate.
I thank you, honourable senators, for listening. I will now turn it over to Mr. Fox.
The Chairman: For my own clarification, did you present to the committee in the House of Commons on the consideration of this bill?
Mr. Fox: Mr. Chairman, we requested to be included in the process through the House of Commons. We were not allowed to make a presentation to that standing committee when it was interviewing witnesses.
The Chairman: Thank you very much.
Senator Angus: They were stonewalled.
Senator Tkachuk: To clarify, you wrote a letter requesting to appear and the chairman or somebody told you that you could not appear or were not to appear?
Mr. Fox: We were told that we were too late. This was after we had been in touch with these offices well before — after the second reading.
Senator Angus: So you were not too late, in your view?
Mr. Fox: No, second reading took place a while after June 17,when we wrote the initial letter to the Minister of Finance.
Senator Prud'homme: Will you kindly take us with you? Briefly — such and such a date, the bill is introduced. Such and such a date, they say, we will have witnesses and on such a date you said, ``yes, we would like to speak,'' but then they said it is too late. Then, when we question you, we will know exactly how unfair or difficult it was for them to accommodate you.
Mr. Fox: Senator, we can provide you with all the specifics of that process. My assistant has all those details, should you request them.
The Chairman: That would be helpful to us. Please continue, Mr. Fox.
Mr. Fox: Thank you, again, chairman, and members of the standing committee and, of course, the Senate.
Our organization, the Indian Resource Council, represents over 120 First Nations across Canada that have oil and gas production or potential on their reserve lands. Our member First Nations own both surface and mineral rights on their lands. These lands are administered by Indian Oil and Gas Canada, IOGC, a special operating agency of the Department of Indian and Northern Affairs Canada.
The stated mandate of IOGC is to fulfil the Crown's fiduciary and statutory obligations related to the management of oil and gas resources on First Nations lands. Our main responsibility is to advocate for increased oil and gas development on Indian lands, and to develop partnerships with industry that would allow for maximum First Nations benefits, and participation in this important energy sector.
The energy sector is an important engine for growth and prosperity, especially in Western Canada, and we feel that First Nations deserve a fair share of this prosperity.
I would like to give you a sense of the size of First Nations oil and gas assets. Oil production for the past five years averaged 505,900 cubic metres per year, or slightly less than 3.2 million barrels. Gas sales averaged 2,260 million cubic metres per year, or slightly better than 80 billion cubic feet. Revenues collected — that is royalties, bonuses and rentals — averaged $163.8 million per year over the past five years.
The money is used by those First Nations for a wide range of initiatives from capital projects to economic development ventures, to employment and training initiatives, as well as for on-reserve housing, water and sewer projects, education and other social-economic programs on reserve.
There are currently over 190 oil and gas companies with operating interests on First Nations lands. Currently, more than 60 First Nations reserve lands have active leases, most with oil and gas production.
First Nations lands are currently less explored and developed than nearby provincial lands or freehold lands. This is mostly due to perceived lack of awareness and certainty of operating on reserve lands. However, our organization has worked closely with Indian Oil and Gas Canada, and with industry, to raise awareness and to promote Indian lands. This has resulted in increased oil and gas activities as shown in the statistics mentioned earlier. The deductibility of royalties and the existing resource allowance have provided an additional incentive for industry to operate on Indian lands.
In comparison to mainstream Canada, industry paid$145.6 billion to governments in 2001 by way of royalties, rental and income tax. Production during this time was 2.2 million barrels of crude oil per day, and 17.4 billion cubic feet of natural gas per day.
Although the First Nations oil and gas sector is a very important economic development for us, it is miniscule compared to the mainstream energy sector. It is for this reason that we wish to retain whatever benefits we enjoy at the present time, which really do not impact Canada or industry in any significant manner.
Let me now comment on a portion of Bill C-48 that is of concern to us. While there appears to have been extensive consultation with the resource industry, including the Canadian Association of Petroleum Producers, regarding the proposed amendments, there has been no consultation with those who will likely be impacted the most, namely First Nations. The Indian Resource Council of Canada, IRC, wrote to the Minister of Finance on June 17, 2003, expressing our concerns with the proposed Bill C-48, especially as it pertains to the resource allowance, and requested a delay until First Nations were fully consulted. Although our correspondence has not been responded to, we understand that copies of the letter have been circulated to appropriate committee members in both the House of Commons and the Senate.
During IRC's annual general meeting held in Calgary on October 8 of this year, a unanimous resolution was approved directing a committee of chiefs to initiate discussions with Canada to delay passage of Bill C-48 until First Nations were consulted. This is one of the reasons we are appearing before your committee today. We have attached copies of the correspondence and the appropriate resolution.
I am not quite familiar with all of the technical details relating to the proposed amendments to the Income Tax Act that are being contemplated under Bill C-48. In a general way, we are supportive of any initiatives by Canada to reform its tax structure to make it fair and competitive as completed under Bill C-48. However, our interest is to ensure that these changes do not impact First Nations negatively.
In our view the proposed elimination of the resource allowance will have a negative impact on First Nations oil and gas sector.
Historically, companies operating on Indian lands have been able to deduct against income the 25 per cent resource allowance, plus royalties paid on First Nations production. Royalties paid on provincial Crown lands have not been deductible against income. This means that industry has been able to achieve higher after-tax cash flows on Indian lands than on provincial lands. These after-tax cash flows have been used to offset the additional costs of doing business on Indian lands. These additional costs arise from the need to negotiate economic and social benefits with First Nations; collaborating with First Nations on training and employment opportunities, and contributing towards community economic and social development. In other words, the resource allowance and the deductibility of royalties have provided industry with an added incentive to operate on Indian lands.
We understand and appreciate that the proposed new tax structure will reduce the tax burden of most oil- and gas- producing companies that operate on provincial lands and put them in a better cash-flow position. However, for First Nations the elimination of the resource allowance will take away an existing incentive to explore and develop Indian reserve lands and will serve to reallocate what has been previously described to be a fair share of resource revenues by taking from potential and most needy First Nations royalty revenues and giving it to corporate Canada.
As mentioned, to date, the resource allowance and deductibility of royalties has supported the ability of First Nations to achieve stronger royalties and a fair share of the overall available economic rent. Without the benefit of the value of the resource allowance, or something in lieu of it, a skewed playing field will result in First Nations lands becoming less competitive as compared to provincial lands.
What do we propose? It is impossible to predict precisely what the impact of the proposed amendment will be to First Nations. However, it is clear that industry will want to renegotiate royalties in order to remain competitive with the provincial regimes. Obviously, this will mean fewer revenues to First Nations, those that need it the most, and better cash flow for industry. Therefore, we are requesting a delay in Bill C-48 until we have had an opportunity to study the implications and to be consulted. At minimum, if the bill is passed, we would ask that First Nations be exempted and that the resource allowance in its present form be retained on First Nations lands.
Alternatively, a similar tax incentive should be considered at the appropriate time for resource exploration on Indian lands in order to maintain the incentive that we previously enjoyed. I want to emphasize the need to provide tax and other incentives to continue attracting industry to First Nations lands.
Finally, we believe it is unconscionable for Canada to contemplate a piece of proposed legislation that will hurt First Nations who need help the most. We are only asking for an opportunity to get the best returns from our resources by attracting industry so that we can help ourselves. The incentives that we currently enjoy, including the resource allowance, is certainly one such tool.
The Chairman: I know there are others at your table but does this represent your presentation? Are you open to questions or is there anything else?
Mr. Fox: We are open to questions. I would ask Ms. Buffalo to make some comments at this time.
Ms. Marilyn Buffalo, Senior Policy Advisor, Samson Cree Nation: On behalf of the Samson Cree Nation, I thank you for this opportunity to be heard in what I believe to be the eleventh hour. I had hoped that the process would accommodate First Nations at the beginning. We may not have had to be here before you today. Having said that, I think that Bill C-48 slipped through behind our watch. We had tried to alert the committees and the internal process of the House but we were not heard.
My assessment is that there are three pieces of proposed legislation before you now: Bill C-7, which is still active in the back; Bill C-6, which is the specific claims; Bill C-19 andBill C-48. We have been fast-tracked, senators. The First Nations are just stretched to the limit against the giant machine called the Department of Indian Affairs and Northern Development who is, by the way, our trustee. It is that department's job to take care of our interest. Mr. Nault's job is to look after the First Nations interest, lands and resources.
I might also recommend to the Senate that you take some time with C-48. What is the rush to get this thing through? Many bills before you now need grave review. No one will go anywhere. The Liberal Party is going through a transition but we First Nations will not go anywhere because this is where we live.
Senator Prud'homme: The resources will still be there.
Ms. Buffalo: There is no rush. I suggest to the Senate that this matter be taken to the Standing Senate Committee on Legal and Constitutional Affairs for further review and study because this matter is currently before the courts. R. v. Victor Buffalo is currently before the courts in Calgary to address an oil and gas issue.
The Chairman: Is this a specific issue relating to this bill?
Ms. Buffalo: Yes.
Senator Prud'homme: If I were you, I would leave it here.
Senator Mahovlich: Leave it in this committee.
Senator Angus: Yes. It is an excellent committee.
Ms. Buffalo: There is no rush, Senator Prud'homme, to get this bill passed.
Senator Prud'homme: That is why I said to leave it here.
Ms. Buffalo: It is not an emergency situation. This requires further study. We have not been consulted. We have not had time to prepare complete submissions to this committee and to the House. How it got this far without our watch is beyond me.
Senator Tkachuk: This letter was written on June 17 to the Honourable John Manley from you, Mr. Fox. Could you table the reply that Mr. Manley sent?
Mr. Fox: We have not received a reply from Mr. Manley's office.
Senator Tkachuk: Did you receive a reply from Mr. Martin?
Mr. Fox: No, we did not.
Senator Tkachuk: Did you receive a reply from Mr. Nault?
Mr. Fox: No, we did not, senator.
Senator Prud'homme: If I were a lawyer, I would say thank you very much.
Senator Tkachuk: I am not so I will continue.
Senator Prud'homme: That is a good question.
Senator Tkachuk: I agree with you that there is no rush on this or any of the bills but the government does not always agree.
I find it strange that there were no replies over the summer months to this question. Since then have you been able to talk to anyone in the minister's office or in the Minister of Finance's office to ask: Why do you not reply to my letter? Did you phone him when you did not receive a reply in a month or whatever it takes to send a letter?
Mr. Fox: We followed up the initial correspondence with phone calls and e-mails. There has been some response throughe-mail, but not to the particulars of that piece of correspondence.
We were requesting an opportunity to speak to the standing committee in the House of Commons after the second reading, but we were not successful in being included on that agenda. We have subsequently been in touch with the Senate. The process here has been very accommodating.
Senator Tkachuk: I am sure I understand. Royalties will be deductible on Crown lands with this new bill. Everyone will be on the same playing field, therefore, the extra costs are coming not because of any tax changes. The extra costs that the companies incur by dealing with the Indian band are the costs to negotiate economic and social benefits on training and employment.
Give me an idea what kind of deal you would negotiate? What kind of money would we be talking about?
Mr. Fox: Since the political leaders and corporate entities of First Nations have been involved in actual discussions with oil companies, the representatives of those First Nations have been able to negotiate items other than strict cash aspects of those agreements.
Oil companies, in some instances, contribute to scholarships. They help with youth programs. It is hard to put a figure on that.
Our bigger concern is that by not having this advantage, we will not likely be attracting many oil companies to undertake exploration and production activity on reserve lands.
The perception of industry is that it is unstable to do exploration and production activity on reserve lands, therefore, to a large extent, it would scare off new investment in that kind of activity. We have to deal with perception much of the time, senator, even though the facts of our situation are different.
We feel that it is entirely a good deal to invest money on exploration and production activities on reserve lands. However, by not having that added incentive, it makes it difficult to do so.
Senator Tkachuk: I gather that this bill allows the deductibility of the royalties from Crown land, therefore making it the same as on Indian land. The problem comes not from the tax change, which evens everything up. The problem comes from the fact that Petro-Canada, or with whomever you are dealing, must commit other cash to the Indian band that was equivalent to the deductibility on Crown land previously. We are talking about a serious amount of money here, I would think.
How do you arrive at that? Do you have a percentage? It seems to be an extra tax for social purposes that would go to the reserve. Is Indian Oil and Gas Canada a company owned by Indians or is that a division of Indian Affairs?
Mr. Fox: It is a special operating agency of the Crown. It is under the auspices of the Department of Indian Affairs and Northern Development Canada. It manages all natural gas and oil resources on reserve lands on behalf of the Crown.
Senator Tkachuk: When you make a deal with Petro-Canada to take gas or oil out of a reserve oil and gas area, do you charge for these social benefits? Do you charge a straight fee such as a royalty or do you work out a cash agreement per year to be spent on economic development, housing or whatever?
Mr. Fox: We have this added incentive, and in most cases we are able to negotiate bigger royalties on behalf of the First Nations. With those, we then have more resources to use for social and economic programs, housing, and so on. We are able to negotiate higher royalties for that.
Senator Tkachuk: You are able to negotiate higher royalties because they were not able to deduct the royalties on the Crown land?
Mr. Fox: On provincial Crown land, yes.
Senator Tkachuk: We now have a level playing field. I am usually on your side, Mr. Fox. However, here it looks like you would like to charge more money. Therefore, that is a problem for you. You are charging a bigger royalty to the Petro-Canada than the royalty charge by others.
Mr. Fox: Most oil companies will pay it one way or another. If they can pay a bigger royalty to the First Nations with whom they are negotiating, they stand a much better chance of acquiring those leases that they may be seeking on Indian reserve lands. It is better for them, too, in that respect.
When oil companies are experiencing a depleting return from either oil or natural gas wells, they will go back to political leaders of those tribes and request royalty relief. If they are able to convince those political and business leaders of those First Nations to give royalty relief, they will, in some instances, get that royalty relief.
They will not only make the request, but they will produce factual information on the extent of depletion of returns on a well. It is either discuss royalty relief or shut down production for those particular wells. It is a give-and-take in those instances.
In some instances we receive higher royalties; other instances we may receive lower royalties. We have 90 different royalty regimes. It is not one standard royalty payment that goes across the board. First Nations, because of their independence, are able to negotiate better royalty agreements sometimes with oil and gas companies. It is a tool that we use.
The Chairman: I have let this go a long time but we have other witnesses and other legislation so it is a very full day. I wanted to give the benefit of the fullest possible discussion here to you.
Senator Massicotte: Obviously our attempt here is to try to reach the issue and the solution because we are all sympathetic.
From my reading of your criticism we acknowledge that it causes some negative consequences to your revenue flow. However, that is because under the existing regime when people extract on your lands they get what could be called an artificial deduction called a royalty, the old 25-per-cent royalty, which on private lands now could equate the royalty paid to the province. Because the government wants to be more efficient and reduce taxes for everyone they reduce this resource allocation 25 per cent. It happens as a negative consequence in your case because the person you are contracting with has less tax deduction, therefore, increasing the cost to him relative to doing business.
Mr. Fox: Yes.
Senator Massicotte: You would have to admit that the act has a proper objective to reduce taxation. It is trying to increase efficiency and overall in our economy when there is competition or efficiency usually we all gain. In this case the act basically causes you to be less competitive because they changed your tax structure somewhat.
Mr. Fox: Yes.
Senator Massicotte: If you accept the act has a proper objective, is there not a simple solution? Before you were getting monies that did not have to be dispersed and they removed that artificial deduction you had. That is the way I look at this. Am I somewhat accurate in summarizing where I see the problem?
Mr. Fox: Yes, if you look at it from that perspective but we also must keep in mind that Canadians, North Americans and industry in general sometimes have a perception of First Nations, their lands and their business dealings that is perhaps of a negative nature.
I have been involved in other types of business activities, for example, selling things in the open market. Unfortunately, competitors have an advantage in calling down the product that a First Nation or an Aboriginal person may be selling as being inferior to what they would be selling. We have all experienced that in Indian country. This is one example of levelling that unfair playing field. Yes, it might seem as levelling the playing field but I think we have to look at the other aspects of doing business in Canada and in North America.
We must keep in mind that there is still a perception in the oil and gas sector that it is unsafe and unstable to invest money in oil and gas activities on reserve lands. We need some added incentive.
Senator Hervieux-Payette: I would like to ask Ms. Buffalo a question. Perhaps in your case there is no rush. I guess the rest of the industry, oil and mining and gas in general elsewhere, I do not see why we could not deal with Bill C-48 without paying special attention to this particular issue.
My interpretation was that you are asking for the status quo in your case, and the rest of what is going on in Bill C- 48 should not be something that would be damaging to you. If the rest of it goes on, I do not think it will change your status. If we keep the status quo, the 1970 deal, you would be satisfied. Do I understand correctly?
Mr. Fox: Yes, I think we must also state that we enjoy a fairly good relationship with the oil and gas industry. We try to work together on a number of different issues. We have tried employment and training and those types of development projects over the years. We have signed memorandums of understanding that we will work together and help each other.
We certainly applaud the initiative of Canada to make exploration activity in the oil and gas sector in Canada more competitive. However, by the same token, what we are saying is, please, keep in mind that if you are going to do that you should also look at the impact that will have on First Nations. Unfortunately, in this instance, that impact is of a negative nature. We are not trying to take away from industry what would seem to be a fair and sincere attempt by our Canadian political leaders. We should not lose sight of the First Nations people because throughout the course of all of the process and the activity that has surrounded the development of Bill C-48, we have not been consulted until now.
Senator Hervieux-Payette: When we had the presentation with the parliamentary secretary, he was not even aware of it, although there are letters in the ministry, both in finance and Indian Affairs. The rest can probably survive but on this question we need an answer from the department.
The Chairman: The department is here ready to respond.
Senator Hervieux-Payette: Tell us why there was no consultation and if there was with the industry.
The Chairman: That is what I am trying to do. We asked the industry officials to stay so that they could respond. The parliamentary secretary said they could do that. I would like to ask the officials for any input they could give us. At this point, I will draw this portion of our inquiry to a conclusion.
Thank you very much for your input. I would now ask if there is anyone from the department or from the minister's office who is in a position at this point to add any enlightenment to us or any further understanding for us.
Now, I can say, if you want to get your heads together, we have two other groups of witnesses on this bill, that we could go to if you want any more time, but I need some input. The parliamentary secretary, our main witness, had to leave and we are without any guidance. They say they are happy to answer any factual questions.
Ms. Louise Levonian, Director, Business Income Tax, Department of Finance: My name is Louise Levonian from the Department of Finance.
The Chairman: To save some time, you have been in the room this morning throughout all of the presentations on this subject. Can you shed any light on this?
Mr. James Greene, Chief, Resource and Environmental Tax Section, Department of Finance: My name is James Greene from the Department of Finance.
Mr. Gérard Lalonde, Assistant Director, Tax Legislation Division, Tax Policy Branch, Department of Finance: My name is Gerard Lalonde, Department of Finance.
Ms. Levonian: I would say that senators have astutely picked up the level playing field and I am happy about that so I will not address that directly unless there are further questions.
I will say, as far as the consultations go, a little history on this file might be useful. In 2000, the government reduced the general corporate tax rate from 28 per cent to 21 per cent. At that time, it committed to consult on allowing access to that lower rate to the resource sector. That was in 2000. Consultations went on, and in the 2003 budget, it was announced that we would be going forward with this. Right after, on March 3, a consultation paper was put on the Department of Finance's Web site. For anyone who wanted to talk about it, it was there for discussion. We consulted quite a bit with industry and the companies that would have projects on First Nations land. This issue was not raised at all until the letter was sent. At that time, the bill was moving forward. Just to put the consultations into context, there has been sufficient time and opportunity to consult. The Department of Finance is always open to consultations. Any person who wants to discuss an issue can do so. We are there and we have met with many, many companies and associations. I would make that point.
The Chairman: To summarize, you think that you were open. Are you referring to the letter from the previous group of witnesses?
Ms. Levonian: That is right.
Senator Angus: That was the June letter to Minister Manley.
The Chairman: It was received too late to have an impact on the process that you were working on?
Ms. Levonian: That is right. I have another point. The department always consults on issues that are raised. I hope that its reputation is such that we are willing to listen to any issues that arise. We would obviously be happy to discuss those issues as well.
In respect of the bill going forward, some of the measures proposed are effective for 2003 — this year. We have received many representations from many companies saying that it is important that the bill pass this year, from their perspective.
Senator Prud'homme: Well, of course.
Ms. Levonian: It is important for their accounting purposes, et cetera. That is what we have heard from them.
I am happy to address any further questions.
Senator Massicotte: I appreciate the issue of timing and I think we will get more dates on that but could you comment on the substance of the letter? In other words, you have to acknowledge that, ``upon removal of the resource allocation'' was an artificial deduction made by any development on Indian lands. By removing that, you have made them, effectively, less tax-interesting from a development sense. Was that considered in the legislation? If so, why did you not continue to provide it by way of exception for Indian lands?
Ms. Levonian: There are a couple of things. The removal of the resource allowance, obviously, is happening across the board. That levels the playing field, for sure. This situation applies not only to First Nations cases but also to any non-Crown royalty. If there is an individual or private owner of a resource and royalties are being paid, it would apply in their situation. It also applies, to a certain extent, to situations where royalties are extremely low. If the royalties are low, there is no deduction for royalties and the resource allowance is being removed. It is not only one situation case where this applies because it is across the board.
Mr. Lalonde: I could continue with the points raised by the parliamentary secretary, that the resource allowance has not always been a happy work experience for both the industry and the revenue collectors, CCRA, in dealing with the complex legislation that has generated a number of disputes. The notion behind this piece of proposed legislation is to recognize that the problem the resource allowances were originally introduced to resolve has largely evaporated. This proposed legislation, to a large extent, puts the legislation back to where it was in the early 1970s. It facilitated, in the course of doing this, the implementation of a general tax break reduction for the whole of the mining, and the oil and gas industry, to put it in a level playing field with other industries in Canada and the tax rate reductions that were announced in the 2003 budget.
Ms. Levonian: You noted well that the deduction we are talking about is actually with the companies and not directly with the First Nations, therefore, the companies are being affected. Negotiations between the First Nations and the companies on what royalties they pay is something that we cannot comment on. Those are contractual arrangements between the company and the First Nations.
Senator Massicotte: I have a supplementary. On private lands, you refer to non-First-Nations. They are also allowed to deduct the resource allocation and the royalties paid to the private individuals?
Ms. Levonian: That is correct.
Senator Hervieux-Payette: On the question of consultation, something puzzles me. The Minister of Indian and Northern Affairs is the trustee for all Indian affairs. Did you say that there was no specific consultation and agreement by the Minister of Indian Affairs? I understand thathe is sitting around cabinet and may not be on the committee; or he may be on the social or economic committee. I do not know where he sits in the government. Did you have the minister conduct the consultations? I know, from Ms. Buffalo, that Bill C-6, Bill C-7, and many other bills are before us and it seems rather strange that Bill C-48 would not be part of the consultative process. The minister travelled the country for a long time. Are you aware that our government did some consultation with the people?
I understand the intricacies of managing that consultative process but the bill would affect them directly; and we have to recognize that. What was anticipated to ensure that this was addressed?
Ms. Levonian: I can only say that the issue was not brought to the attention of the Minister of Finance.
Senator Hervieux-Payette: I understand.
Ms. Levonian: I must add that there were extensive consultations around the country. There was an announcement in 2000, the Budget 2003 and a consultation paper. This issue has been around for a while.
Senator Hervieux-Payette: There was a leadership race in the native community this year as well. They are also going through that period of turbulence.
Senator Mahovlich: This country has Mr. Nault and DIAND because First Nations and all Aboriginals are not on a level playing field. When we deal with them and when we do things that affect them we must consult with them. Each band is different and all the negotiations are different. It will be difficult.
However, on this particular item, someone should have realized that there was one billion dollars here within five years that the First Nations of that part of the country were going to be missing for their social affairs or whatever. Some attention should have been drawn to this.
Senator Prud'homme: I see there is no answer, but by the gesture, she seems to say what? Tough luck, or I am sorry?
Ms. Levonian: There is no answer because I am not sure what the question was.
Senator Mahovlich: My question was that you are thinking that there is a level playing field, but there is never going to be a level playing field in this country for First Nations and their interests.
That is why we negotiate with them, to bring them up.
Ms. Levonian: The one thing I would respond to is focused on a tax response. I am sure there are many programs that are handled at the Department of Indian and Northern Affairs, but this is a tax change of general application. Concerning those other elements, I think the consultations were quite extensive and I do not know how much more to say. We really were out there listening to everybody who wanted to tell us what their issues were on this.
The Chairman: Sorry, on part of this communication, there is one factual question that I would like to clarify. When you were indicating when things were announced and when the process, in fact, opened up, when did you say that the elimination of the resource allowance was announced?
Ms. Levonian: That would have been in Budget 2003, which was, I think, February.
The Chairman: I had understood you to say in 2000.
Ms. Levonian: In 2000, we indicated that we would consult on ways to extend the lower tax rate to the resource sector.
The Chairman: That was a general statement of objective, but the specific announcement on the elimination of the resource allowance was not until 2003.
Senator Prud'homme: In 2000, you said you announced you were going to start a process of consultation. That was three years ago.
In that process of consultation, did you have a list of people you would consult with? If so, among those people with whom you were to consult, were there people from the First Nations who appeared before?
Ms. Levonian: The way the consultations would be done is that we would put out there that we are consulting. There are so many stakeholders that I think the onus is partially on us to be sure we have the information out there, so that people understand that we are consulting, but I think that issues have to be brought to us as well.
The Chairman: Senators, I am in your hands, but I have to pause now to take a look at the realities of where we are today. They have questions to ask here and we may have information to gather. We have two other panels of witnesses on this subject and the time is now 12:45 p.m.
With your agreement, I would suggest we limit our consideration today to Bill C-48, and that we do not even attempt to get to Bill C-249 — in fairness to ourselves, but very much in fairness to the issues involved there. We are clearly going to be in a position that, at the last minute, we will be asking people to open up complicated subjects. I suggest we proceed that way so everyone in the room knows where we are.
Senator Tkachuk: We now have a month — no problem — maybe six weeks. Slow everything down. Let us go home.
The Chairman: Our task today is the bill in front of us. Are there any more questions of the departmental witnesses now? If not, I would then move to the next witnesses.
Our next panel of witnesses are Ms. Catherine Coumans from the Green Budget coalition and Ms. Elizabeth May, Executive Director of the Sierra Club.
Ms. Elizabeth May, Executive Director, Sierra Club of Canada: The Sierra Club of Canada and Mining Watch Canada, to my right, are member groups of a coalition of 17 national Canadian environmental organizations working together as the Green Budget Coalition.
This is my first time appearing before the Standing Senate Committee on Banking, Trade and Commerce and this is not the natural habitat of an environmentalist.
Senator Angus: I am here.
Senator Kelleher: I am here.
Ms. May: I did not mean to cast any aspersions on members of the committee.
We are committed as the Green Budget Coalition, brought together by a common understanding that fiscal instruments, to the idea that the decisions of government, in relation to the budget, make profound statements about our environment. One of Canada's leading diplomats and senior public servants, Jim McNeil, a distinguished Canadian, was a deputy minister for the government and in Europe a head of the environment division at the OECD, and went on to be Secretary-General of the Brundtland commission. He has said that the single most important environmental statement that the government makes is its budget.
It is in that context that we are appearing before you on what the parliamentary secretary for the minister would have us believe is purely a banking instrument and nothing to do with the environment.
I became very interested in the last conversation that took place before this committee. My background is in law. I am not currently practicing but I am familiar with case law in relation to the constitutional obligations of the federal government in consultation with First Nations people. I would like to emphasize to this committee that I think there is a serious problem with proceeding with this legislation until the issue that was just brought before you is resolved. It could become the subject of future court actions.
I know for a fact that it is not adequate consultation in law with First Nations to put out policy documents on Web sites or in budget speeches. The nature of consultation with First Nations governments is now the subject of Supreme Court of Canada decisions in R. v. Sparrow and in R. v. Marshall and it requires a positive, active solicitation of opinion. It is not passive, therefore, I think someone missed something important here in executing the federal government's fiduciary duty to First Nations.
It certainly is not an issue that I had noticed in reviewing this bill. I do not pretend to be an expert on it but I did want to emphasize that it seems to me that you should not proceed without legal advice as to what the nature of the duty was on the ministers involved in this process. I think there really is no reason to proceed with this bill. For the rest of my presentation you will find out why it would be a good idea not to proceed with it at all.
I also want to commend this committee. I did not find that chaotic. I found it close to inspiring. You actually were digging for something and brought the government witnesses back. I do not think I have ever seen that before and I was quite impressed.
The intent of Bill C-48 is to reduce taxes for the oil and gas industry. This is, perhaps, a defensible policy objective were it not for the fact that it runs diametrically opposed to the Government of Canada's commitment to the Kyoto Protocol and the greenhouse gas emissions.
The oil and gas industry is doing particularly well at this time. The $260 million per year in lost revenue that this bill represents to the government from this tax break could be used far more positively to enhance energy conservation and efficiency.
On October 21, eight government members in the House of Commons as well as 39 opposition members voted against this bill at third reading. I can refer you to the images that immediately come to mind of the fires in British Columbia, the floods this summer, and the impact of the ice storm. We are seeing increasing losses due to natural disasters that are completely consistent with what the scientists say we can expect in a climate change world.
Given the importance of Canada's commitment to the Kyoto Protocol and the increasing economic damage caused by climate change it is my sincere hope that the vote of both government and opposition members has sent you a message about the importance of policy coherence between what the Government of Canada is committed to in reaching Kyoto objectives and how it speaks to the economy and sends out signals that match those same goals. This bill does the opposite.
Bill C-48 would reduce the taxation rate for the oil and gas sector from 28 per cent to 21 per cent. This raises the question: Is this an industry in trouble? Does it need the assistance? Why apply this form of tax relief to an industry which is consistently posting large profits and which is likely to post large profits in the decades ahead. This is an important question from a policy point of view.
The time limit available for the exploitation of this resource, which, of course, is finite and non-renewable is not very long. In return for this free resource, the industry pays taxes. The present rate of 28 per cent has been justified over the years as a form of payment by this industry to the Canadian public. It permits governments to do things for the public good from pensions to education, to health care, to other services that keep this country together and functioning.
This is another reason why this committee should rejectBill C-48. At this point my brief should indicate that I am more or less quoting one of the government members who spoke against this bill in the House of Commons and that is the chair of the standing committee on the environment from the other House, Charles Caccia, who said that it can be spelled out in one very short word and that word is Kyoto. It is important to briefly explain Kyoto because, as Mr. Caccia has said, it has become a buzz word that implies a great deal.
Canada, by virtue of ratifying that accord last December by a vote here in the Senate and in the House of Commons is now committed to reducing greenhouse gas emissions. These are the gases produced when we burn fossil fuels from petroleum to oil to gas to coal. All fossil fuels produce greenhouse gases when burned. Canada is committed to a reduction of green house gases of 6 per cent below 1990 levels to be achieved in what is called the first budget period, 2008 to 2012. Simply, our deadline is 2012.
While this may seem a very small reduction, actually it is not, because due to increased economic activity and decreased energy efficiency, we have allowed emissions to rise since 1990. In order to achieve Kyoto, we need reductions in the range of somewhere between 23 or as much as 25 per cent. This is a major undertaking.
I should mention, it is just the first step. The international scientific community, through the intergovernmental panel on climate change, has said to reduce catastrophic impacts of climate change long term over the coming decades, we need reductions in the order of 60 per cent below 1990 levels globally. Kyoto is understood by all those scientists and policy makers who work in the area of climate change as only a first step.
Even achieving that first step is challenging, therefore, senators should want to pass legislation that facilitates the achievement of Canada's Kyoto goals. Instead, Bill C-48, as now written, will make it more difficult to achieve those goals that the Government of Canada has set for itself.
I would like to quote from an intervention by another member of parliament, in his third reading intervention, namely, Clifford Lincoln, Member of Parliament for Lac St-Louis, and one of the most distinguished Canadians it has been my privilege to know. A former minister of Environment from the Province of Quebec, he is more knowledgeable than almost anyone I know on these issues. Quoted from the report of the commissioner on environment and sustainable development, in particular relating to direct government spending on non-renewable energysources — and this excludes nuclear energy — it has been about $202 million a year. Over five years, of course, that is one billion dollars to non-renewable, non-nuclear energy sources.
Between 1998 and 2002, the oil sands tax expenditure was approximately $597 million over five years. The oil and gas investment tax credit amounted to $128 million. Over five years, this amounts to $640 million. Therefore, over the last five years, when you include the nuclear element, approximately $2.9 billion has gone into subsidies for oil and gas and nuclear.
In the year 2000, the commissioner of the environment and sustainable development published a report on the energy sector. Section 3.86 in the conclusion of the report reads:
Two important ways to address climate change are using energy more efficiently and establishing a more sustainable mix of energy sources, which means a greater reliance on renewable sources. The federal government stated in its 1996 Renewable Energy Strategy that it wants to increase investments in renewable energy. It has also said for many years that it wants Canadians to use energy more efficiently, and the Office of Energy Efficiency is currently promoting this goal.
The Office of Energy Efficiency is within the Department of Natural Resources. It also stated in this same report that ``...the tax system does not give any preferential treatment to certain investments that improve energy efficiency.''
As Mr. Lincoln stated, ``We are loading the dice in favour of favourable tax treatment to the non-renewable energy sector, the fossil fuel sector, while not providing any favourable tax treatment to the renewable sector.''
The same report goes on to describe the various types of federal support the non-renewable industry sector has been receiving. Since 1970, the federal government has written off a staggering $2.8 billion of its investments and loans for energy projects in the non-renewable sector. I repeat: $2.8 billion.
During the report stage debate of Bill C-48 in the House of Commons, the parliamentary secretary to the Minister of Finance made no reference to Kyoto or how the bill would affect achievement of Canada's commitment. This lack of reference to Kyoto is very disturbing. At least some explanation ought to be given as to how this tax reduction to the oil and gas sector is even possible in light of the government's commitment to Kyoto, and the heavy engagement by Canada in reducing its greenhouse gas emissions.
I submit to you respectfully that this bill should die in the Senate. It should die because it runs counter to, and opposes, the achievement of a goal set by the Government of Canada, and counter to its policy, which was decided by the entire government and by this Senate by way of the vote I referred to earlier last December.
Bill C-48 is an emanation of just one department, the Department of Finance. It is not the policy of the Government of Canada as a whole; and since it runs counter to that policy, it ought to be rejected for that reason alone.
As you can see, on the one hand, the Government of Canada did the right thing in ratifying the Kyoto Protocol — it was a good measure, it was a good decision. In addition to that, the Government of Canada has invested over $3 billion as of the year 2000, over a period of years, toward the implementation of its climate change commitments. On the other hand, we see here a proposition in this bill that is aimed at reducing taxes to the oil and gas industry. This measure makes no sense, because it would simulate and accelerate emissions of the greenhouse gases that we are striving to reduce in order to meet Kyoto objectives. Bill C-48 should not, therefore, be approved by the Senate because it is not in the public interest, and because it runs counter to government policy.
During his third reading intervention Charles Caccia, former federal minister of the Environment, current chair of the House of Commons Standing Committee on Environment and Sustainable Development and member of parliament for Davenport, spoke of recent consultations he had with the International Energy Agency in Paris — an agency devoted to the study of energy, its production and its availability to the global community.
According to the International Energy Agency, in about 50 years we will have reached the depletion point for oil and gas — give or take perhaps a few years, depending on technological advancement and the ability through technology to use this resource more efficiently. That is the purpose of having energy-efficient programs and efficiency research in the coming years — to make the resource last not for one or two generations, but perhaps three.
Mr. Caccia concluded from his meetings that we should be slowing down the exploitation of oil and gas resources rather than accelerating it. It will be more valuable to Canadians when it is far rarer elsewhere rather than doing our best to get it all out of the ground and sell it to the United States as quickly as possible.
Bill C-48 is, therefore, out of sync. It does not fit into the long-term picture that the government should be trying to come to grips with.
I note, parenthetically, that one of the problems in the energy area for the Government of Canada is that while we have a commitment to Kyoto, we have no energy strategy or plan. I know those are bad words, because they come close to the big bad history of the National Energy Plan, but having some national energy strategy is certainly a good idea.
In conclusion, it is therefore in Canada's interests to exploit carefully its natural resources to make them last as long as possible. For the oil and gas industry, the earnings are high. We read about them in the business pages of the newspapers. The profits are high, therefore, why reduce taxes? Why give the oil and gas sector a pre-Christmas present of $260 million a year? Why forgo revenue that is estimated by the Department of Finance at exactly that amount?
I will add a few banking comments, if I may, because those were all environmental comments. In reviewing this bill and reviewing parliamentary —
The Chairman: May I interrupt? The committee has no power to sit more than 10 minutes, and there are senators with questions.
Ms. May: I will save these final points on the inconsistent applications of this bill to various industry sectors. I do not think it meets the stated objective of the government to level the playing field. The playing field remains unlevel in many ways that are not environmental, but purely business-related. I will leave those points.
The Chairman: We will be happy to have a submission in writing from you, and it will be considered by the committee.
Ms. May: With that, I thank you. My colleague from the Mining Watch Canada would like to say something. Would you like to give me questions or have her appear first?
The Chairman: We only have 10 minutes. We are not permitted to sit after 1:30 p.m.
Ms. May: I do apologize; I misunderstood your point. I am very sorry. I will stop talking.
The Chairman: I have questions ready now, which I will recognize and we will see what happens.
Senator Tkachuk: You talk about the amount of money that the government will forgo by decreasing the taxes in the oil and gas industry. If, at the end of a number of years, they actually make more revenue, will you then end your opposition to lower taxes?
Ms. May: The federal government?
Senator Tkachuk: You claim that there will be revenues forgone. I believe that there will actually be more revenue to the federal government by decreasing taxes than by increasing taxes, which has been the economic consequence of lower tax rates at almost all times.
Ms. May: I believe in ecological fiscal reform; that we should tax those things that we do not want and reduce taxes on the things we do want. We should allocate our taxes in ways, I agree. We can find ways to use taxes as policy instruments.
I do not believe that this tax break — this give-away — to the oil and gas sector will, in the long run, increase the tax base for the Government of Canada. I do not agree with the premise of your question. When budgets are determined, we could find ways within a revenue-neutral fiscal climate, to actually reallocate taxes to substantially encourage those things that we want in society, including higher corporate profits and personal income, while placing taxes on the things that we do not want, such as pollution and a degraded environment.
Senator Tkachuk: You talked about the Kyoto Protocol and we asked the minister what the bill has to do with the Kyoto Protocol. I know your point is that by increasing taxes we use more energy but the government, obviously, seems comfortable with the fact that we will meet our Kyoto commitments. I am not even sure what they are or how they can be achieved. I have not seen a plan so I do not know and I do not know how you know, either. The minister claimed that they thought Canada would meet its Kyoto commitments.
What evidence do you have that we will not?
Ms. May: There is a plan that the government published for meeting Kyoto targets last year before the ratification. Since then, the government has come through with some significant spending but, quite honestly at this moment, I cannot tell you whether we will meet our targets. Decisions like this work against our meeting of those targets. There have been substantial concessions to what are called the ``large industrial emitters'' that have been made by the government. We are in a transition now and I do not know how the next Prime Minister will sort out some of the federal government's intentions sector-by-sector to meet these targets. I think at this point these intentions are not clear. It is certainly a poor decision that was made in the case of large industrial emitters to allow them to reduce their emissions in relation to emissions intensity, which means that, overall, their emissions could go up while they meet the targets of reducing their emissions per unit of production.
Senator Tkachuk: I am consistent on this in that I oppose the Kyoto Protocol.
Senator Massicotte: I want to make sure I understand your comments. You are suggesting that, to the extent that you make the industry more competitive by reducing taxes, they will expand their economic activity and maybe develop more, and so on. I do not know if you acknowledge but we are being told that the tax rates we are planning for the industry are comparable to other industry sectors. I gather your argument is to make them more competitive and they will develop more and, consequently, cause environmental problems. You would suggest, therefore, that we make their tax rates less competitive than other industry sectors and discourage development and, as a result, negatively affect our economy because they represent 8 per cent of our GDP factor. Your argument is that this resource will only become more valuable in time so the loss in economic benefits in the short term will be offset in the long term by the fact that this limited resource will be more valuable in the future.
Do I understand your argument, in essence?
Ms. May: Not exactly because we are not suggesting that. The oil and gas sector is doing quite well now with the current 28 per cent tax rate. There is no need to reduce the tax rate. If you are trying to level the playing field, it is a little late because, over a period of decades, the federal government has manifestly subsidized the sectors that are non- renewable and polluting to the disadvantage of the sectors that can produce clean, reliable energy. It is not consistent with reaching the Kyoto Protocol commitments to continue to subsidize and to actually increase the subsidies to the oil and gas sector when you are trying to get them to be more efficient. In terms of competitiveness, the private sector is very innovative and they will manage to be profitable. However, when you have a signal that allows continued waste in the system, it is not a driver for efficiency the more tax breaks you give. That is opportunity foregone to use that money for other things.
I would also dispute that this levels the playing field. I want it on the record from the Institute of Chartered Accountants magazine that analyzed this measure and said that, from a federal tax perspective, there will be winners over the phase-in period, such as companies with higher royalty rates such as oil and gas producers operating in Western Canada. However, there will be losers in such provinces as Saskatchewan, Manitoba, Quebec and the Maritimes where the elimination of the resource allowance deduction to companies that benefited from the resource allowance resulted in an increase in the overall effective rate. If your argument is that we need to ensure that this resource sector is competitive and has the best tax rate available, this bill does not do that.
Senator Massicotte: You are saying that the tax rate for this sector is less than it is for other economic sectors.
Ms. May: Yes. The effect of this bill, from everything that I have read, is that the big winners will be the oil and gas sector. Across the mining sector, there will be many losers and a few winners. It is not a level playing field at all.
The Chairman: I know that we have another witness but the clock tells us that it is time. Our rules do not permit us to sit longer.
On behalf of the committee, I thank our witnesses today.
The committee adjourned.