THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
OTTAWA, Tuesday, October 6, 2026
The Standing Senate Committee on National Finance met this day at 9 a.m. [ET] for the subject matter of all of Bill C-31, A second Act to implement certain provisions of the budget tabled in Parliament on November 4, 2025.
Senator Éric Forest (Deputy Chair) in the chair.
[Translation]
The Deputy Chair: Honourable senators, welcome to all the senators as well as all the Canadians across the country who are watching us on sencanada.ca.
My name is Éric Forest, senator from Quebec and deputy chair of the Standing Senate Committee on National Finance. I will chair the first part of the meeting today, and our chair will take over during the meeting.
I would now like to ask my colleagues to introduce themselves.
[English]
Senator Pupatello: Sandra Pupatello, Ontario.
[Translation]
Senator Gignac: Clément Gignac, senator from Quebec.
Senator Galvez: Rosa Galvez from Quebec.
Senator Cardozo: Andrew Cardozo, senator from Ontario.
[English]
Senator Ross: Krista Ross, New Brunswick.
Senator MacAdam: Jane MacAdam, Prince Edward Island.
[Translation]
Senator Hébert: Martine Hébert from the Victoria division of Quebec.
The Deputy Chair: Honourable senators, today we are starting our study on the subject matter of Bill C-31, A second Act to implement certain provisions of the budget tabled in Parliament on November 4, 2025.
For our panel today, we are pleased to welcome, from the Department of Finance, Max Baylor, Director General, Business Income Tax Division; Lauchlin MacEachern, Acting Director General, Legislation; Gervais Coulombe, Director General, Legislation; and Peter Repetto, Senior Director, Outbound International Tax Section.
From the Canada Revenue Agency, we welcome Lorraine Redekop, Director General, GST/HST and Digital Compliance Directorate, Compliance Programs Branch; and Adnan Khan, Director General, Individual Returns Directorate, Assessment, Benefit and Service Branch.
Welcome and thank you for accepting our invitation to appear today. I understand that only the Department of Finance will be delivering opening remarks today. We will hear from Mr. MacEachern. The floor is yours.
Lauchlin MacEachern, Acting Director General, Legislation, Department of Finance Canada: Thank you. Good morning.
[English]
I’m Lauchlin MacEachern, Acting Director General, Legislation, Tax Legislation Division, Department of Finance Canada. I’m joined today by several colleagues to speak to Parts 1, 2 and 3 of Bill C-31, which include tax measures announced in Budget 2024, the 2024 Fall Economic Statement and Budget 2025 that would affect personal income tax, business income tax, tax administration, tax integrity, international tax and sales and excise taxes.
Personal income tax measures included in Part 1 of the bill would help deliver automated federal benefits to lower-income Canadians, simplify, streamline and harmonize the qualified investment rules for tax-deferred plans, and wind down the administration of the Canada Carbon Rebate.
Business income tax measures included in Part 1 of the bill would provide temporary immediate expensing for eligible manufacturing or processing buildings, expand the clean hydrogen investment tax credit to include hydrogen produced from methane pyrolysis as an eligible production pathway and clarify the expenses that qualify as Canadian exploration expenses.
Tax administration and tax integrity measures included in Part 1 of the bill would implement the Cypto-Asset Reporting Framework, enhance the efficiency and effectiveness of information gathering by the CRA during tax audits, introduce a supplementary rule to strengthen the tax debt anti-avoidance rule, remove bankrupt corporations, trusts and partnerships from the exception to the debt forgiveness rules, expand the anti‑avoidance rule for direct trust-to-trust transfers to include certain indirect transfers of trust property to other trusts, and limit the deferral of tax on investment income resulting from the use of tiered corporate structures with mismatched year-ends.
Part 1 also includes an international tax measure that would suspend the operation of the Canada-Russia income tax agreement.
Part 2 of the bill would amend the Global Minimum Tax Act to implement the Undertaxed Profits Rule, or UTPR, among other things.
By way of background, Canada is one of over 140 members of the Organisation for Economic Co-operation and Development, or OECD, inclusive framework on base erosion and profit shifting that have joined a two-pillar plan for international tax reform that was agreed to in 2021. Pillar Two of that plan is a framework for a global minimum tax regime.
The Pillar Two rules are designed to ensure that the profits of large, multinational businesses — those with annual revenues of €750 million or more — are subject to an effective tax rate of at least 15% in each country where they operate. This is intended to reduce the incentive for multinational businesses to shift profits into low-tax jurisdictions and to set a floor on tax competition among countries.
The undertaxed profits rule, or UTPR, is a key backstop to the global minimum tax, which is necessary to ensure that multinational corporations headquartered in countries that do not implement the global minimum tax are nonetheless subject to that tax in the implementing countries in which they operate.
Part 2 would also implement a “side-by-side safe harbour” that was agreed by the inclusive framework countries in January of this year. This safe harbour excludes multinational companies that are headquartered in a jurisdiction with a “qualified side-by-side regime” from certain elements of the global minimum tax. Generally, a jurisdiction will be determined to have a “qualified side-by-side regime” if its income tax system provides for effective tax rates that are comparable to the 15% minimum rate under Pillar Two.
Finally, Part 3 would amend the Excise Tax Act, the Excise Act, the Excise Act, 2001, and other related texts to implement a range of sales and excise tax measures included in the bill. These measures primarily modernize and clarify GST/HST rules to preserve tax neutrality, correct technical gaps, reduce administrative burdens and align the legislation with its intended policy.
This concludes our opening remarks for Parts 1, 2, and 3 of Bill C-31.
[Translation]
Thank you.
The Deputy Chair: Thank you. We will now proceed to questions.
I would like to inform senators that you will have a maximum of four minutes for the first round. Therefore, please ask your questions directly. To the witnesses, please respond concisely.
[English]
Senator Cardozo: Welcome to all the officials who are here.
I would like to ask about the auto-fill aspect of tax filing. Could you provide us with more information about how it works and how you would be coordinating the information with charitable donations? I would love to come to tax time and not have to look for those charitable tax receipts that I can’t find when I really need them. Is your system going to be able to capture those together?
Pierre Leblanc, Director General, Personal Income Tax, Department of Finance Canada: Thank you, senator, for your question.
In terms of automated federal benefits, there are a couple of measures. I’ll talk about the one that’s in the bill. There are also prefilled returns, which is a very important initiative, but something that’s separate. It was announced by the government about a year ago but is not in the bill.
What’s in the bill is basically another tool that will be provided to the CRA that will give the CRA the discretion to file a tax return for someone who hasn’t filed for themselves. The idea is that this would be in targeted cases. Basically, someone would have to have income low enough to be in a non-taxable situation. All of their income would come from slips provided, whether it’s T4 from employment income or certain types of income coming from government, whether it’s OAS, GIS, CPP or QPP. Those would have to be the sources of income. At least in one of the previous three years, they wouldn’t have filed a tax return.
Basically, how it would work is that there will be a 45-day period after which returns are supposed to be filed — so April 30, generally. At that point, the individual who would be selected under this provision would be told, “Here’s the information we have on you,” and would be given 90 days to confirm or correct the information. They could opt out of this process if they wanted to. At the end of the 90 days, if there is no response, they would be considered to have filed.
In some cases, the CRA will be able to pay out benefits on the basis of that. In other cases, the CRA might require certain additional information to be able to pay out benefits. Marital status would be an example. That’s what you have in the bill before you. In fact, it’s one of several measures — the CRA could talk more about these — to try to get people the benefits to which they’re entitled.
In terms of charitable donations, perhaps it’s something down the road, but it’s not something contemplated at the present time. In terms of the measure you have in the bill before you, it is focused on those who have incomes low enough such that they’re non-taxable. In that case, it wouldn’t matter whether they made a charitable donation or not. It’s not going to change their tax payable because they don’t have any tax payable.
Senator Ross: I’m interested in more information on the expenses that qualify for the Canadian exploration expense. Who would be speaking to that?
Mr. Baylor, I note that this excludes expenses related to assessing the economic viability or technical feasibility of extracting resources. Can you expand on that and explain why that wouldn’t be included, and also how businesses can determine the difference between that portion of their expense and determining the resource?
Max Baylor, Director General, Business Income Tax Division, Department of Finance Canada: Yes. In terms of background, as you suggested, the Canadian exploration expenses are expenses that are deductible at a rate of 100% when they’re incurred. Certain of them, when they’re transferred to investors, can be eligible for the mineral exploration tax credit and the critical mineral exploration tax credit.
Currently, the critical exploration expenses include expenses incurred by a taxpayer for purposes of determining the existence, location, extent or quality of the mineral resource. What’s at play here is the notion of quality.
Traditionally, the interpretation by the Canada Revenue Agency around the meaning of quality was that it would relate to the resource’s underlying physical characteristics. It wouldn’t include things like engineering feasibility or economic viability.
Here’s what’s at play here: There was a recent Supreme Court of British Columbia decision that held that quality under the provincial equivalent of the program could be interpreted to include the economic viability of the resource and not just the physical characteristics of that resource.
The reason that’s meaningful and what this change is trying to address — and this gets to your question — is that these expenses are intended to support the highest risk, early stage mineral exploration expenses — so activities that generally have a higher likelihood of failure.
You’re talking about prospecting, expenses relating to prospecting, surveys, drilling and trenching. These types of expenses are aimed at discovering the potential mineral deposit, whether they’re there or exist, and not so much in terms of developing them.
By contrast, once you’ve established the physical characteristics of the deposit, then projects move to an assessment phase where you’re looking at the economic or technical feasibility; that’s where you’re talking about a different category of expenses, and that’s what this ruling would have potentially brought in.
Essentially, this amendment goes back and says, “No, we’re going to ensure that the law reads the way it has been traditionally interpreted.”
Senator Ross: How are you finding that industry is responding to this particular piece?
Mr. Baylor: In terms of the feedback on the legislation itself, we didn’t get much feedback. I believe we received one submission arguing against the change, but that was it.
More generally, we’ve certainly heard from the industry. What’s at play is what I’ll refer to as technical studies and the expenses related to technical studies. They tend to relate to these types of expenses where you’re assessing the economic viability and the engineering feasibility of developing and extracting the resource. Obviously, that’s something that the industry has looked at in order to have that definition expanded to include these types of studies.
[Translation]
The Deputy Chair: Thank you.
Senator Gignac: Welcome to the witnesses. I would like to talk about this tax measure, that is, immediate expensing for manufacturing buildings. I understand that the manufacturing floor space has to be 90%. Why 90%? Why not 60% or 100%? I’m trying to understand the logic there.
Mr. Baylor: Certainly. Basically, this is a rule that has been around for a long time. Before this change, buildings had a basic depreciation rate of 4%, and 6% gets added if that 90% threshold is reached. That threshold is essentially maintained to allow for immediate expensing, which is much more generous.
As for the choice of threshold, it’s fairly standard. The 90% threshold features in the Income Tax Act; maybe my colleagues can speak to that. It’s basically to ensure that almost everything is there, but it allows for a certain flexibility at the same time.
Senator Gignac: Obviously, it isn’t as fortunate as the Productivity Mega Deduction that Prime Minister Carney announced. We agree with this approach to making Canada more competitive and trying to increase our productivity. What is the tax cost of this measure when it comes to manufacturing? We aren’t talking about billions of dollars, as with the Mega Deduction.
Mr. Baylor: Over five years, until 2029-30, we’re talking about $1.2 billion. You’re right, this isn’t part of the Productivity Mega Deduction that was just announced a few weeks ago, but it was part of the broader measure.
Senator Gignac: Does this have to do with harmonizing with what the United States is doing in this regard?
Mr. Baylor: Absolutely.
Senator Gignac: It was decreed to us in the various committees; I’m fortunate enough to sit on another committee, and we’re talking about the rapport with the United States. This brings us in line with how the United States is doing things.
Mr. Baylor: Absolutely. A very similar measure has been implemented in the United States.
Senator Gignac: I saw in the asterisk notes that you made a change to the Select Luxury Items Tax Act. Some interesting debates were had with Senator Forest, who is chairing the committee this morning.
You made amendments regarding luxury taxes. Is that in Bill C-31 — I forget some of the details — in a schedule somewhere?
Mr. Baylor: That’s another file. I’ll turn to my colleague, who will be able to answer you.
Senator Gignac: I would like to have a balance sheet. How much money did that whole thing make? It got a lot of media coverage. There’s Bombardier and boat builders. We remember being told that it would bring in hundreds of millions. I don’t know if the government backtracked in the end. Let us put it that way.
Gervais Coulombe, Director General, Legislation, Department of Finance Canada: Thank you for the question, senator.
The main measures on the luxury tax were in last year’s budget implementation bill, Bill C-15, in which we removed the luxury tax on boats and aircraft.
What you have in this bill here is really a technical amendment to adjust to the tax measures that had been announced regarding the administration of what remains of the luxury tax for vehicles.
We can come back to you separately.
Senator Gignac: The bulk was done in last year’s budget, and these are minor adjustments; let us put it that way.
Mr. Coulombe: Absolutely. Here, we’re really talking about the stewardship of tax laws.
[English]
Senator MacAdam: Thank you to the witnesses for being here today. My first question is about the new audit powers of the CRA. The Tax Executives Institute says that the waiver safeguard covers the compliance order penalty but not the notice of non-compliance penalty and that a review tests only whether the decision was reasonable. Why does the notice of a non‑compliance regime lack the same safeguard?
Mr. MacEachern: Thank you for the question. I’m sure, as you know, that these CRA audit powers are proposed to assist the CRA with obtaining information requests from taxpayers who may delay. There are two different proposed new penalties: One is a compliance order penalty, which would apply if there is a court order against the taxpayer for failing to provide information or assistance to the CRA. The other is a notice of non-compliance penalty, which would apply if the CRA has issued a notice for the taxpayer to comply and the taxpayer has failed to do so.
The taxpayer would have certain rights of review, for example, to request that the CRA review the notice of non-compliance if, for example, perhaps the documents are not available to the taxpayer, the time to provide them is unreasonable or any other factors. A taxpayer would have 90 days to request a review of the notice of non-compliance, and then the CRA would have to consider that review and either confirm, vary or vacate the notice of compliance within 180 days, and following that, the taxpayer would still have rights to challenge the penalty itself.
So there are safeguards and a due process built into the proposed rules. The nature of the two penalties is a little different in that a penalty for a compliance order is generally a measure of last resort for the CRA. A notice of non-compliance would also be a fairly last-resort type of measure.
Senator MacAdam: How often does CRA expect to use these compliance orders, and will it publish how many are vacated, reduced or waived?
Adrianna McGillivray, Director General, High Net Worth Compliance Directorate, Compliance Programs Branch, Canada Revenue Agency: My apologies, as it was a little difficult to hear at the back of the room, but I believe you were asking about how often we might use them.
Senator MacAdam: Yes. How often does CRA expect to use them? The compliance order can bring a penalty of 10% of aggregate tax payable. I’m wondering how often the CRA expects to use that type of penalty. Would they publish how many are vacated or waived?
Ms. McGillivray: Thank you for the question. As my colleague from the Department of Finance mentioned, it is often a last resort. There are many avenues that we pursue with taxpayers to obtain information before we reach a compliance order. Compliance orders themselves are quite rare. Therefore, a penalty associated with that compliance order subsequently would also be quite infrequent.
In terms of the notice of non-compliance, similarly, this would be in persistent and deliberate cases where taxpayers are deliberately not complying with the CRA’s request for information. We would see this as being used in serious cases and cases where there is persistent and deliberate interest in not complying.
Senator MacAdam: The bill lets CRA demand foreign-based documents and share GST/HST and excise information with other countries. How many requests does the CRA expect each year and from which partners?
Ms. McGillivray: I wouldn’t have that information available. I’d have to return with an answer to that.
Mr. Coulombe: I guess your question refers to clauses 218 and 224 in the bill. This amendment is about updating the information collection powers of the CRA as it relates to international treaties. Under treaties that Canada has entered into with its international partners, Canada has agreed to provide relevant tax information to those partners to ensure compliance with tax statutes. There was a federal court decision that determined that the current laws did not permit the CRA to collect certain tax information and share it with treaty partners. The measure is intended to clarify that the rules related to the collection of information sought by treaty partners apply appropriately, ensuring that the government is able to meet its international commitments.
The proposed amendments that you currently have in the Excise Tax Act and the Excise Act, 2001, would ensure consistency with similar amendments that have been brought under the income tax regime in previous tax statutes.
Again, we need, from time to time, among tax statutes to allow the CRA to properly —
[Translation]
The Chair: Thank you.
Senator Hébert: My question is about immediate expensing for manufacturing buildings. I’m going to follow up on what my colleague Senator Gignac said earlier about the 90% threshold.
I understand that it’s an old tradition in Canadian tax laws to use this threshold, but I think we’re at a pivotal moment when it may be time to modernize certain traditions.
I was wondering how this measure was assessed in light of the need we have in Canada to catch up in terms of productivity, particularly in the manufacturing sector.
Say that there’s a manufacturing company, for example, that does not have 90% of its floor space but does have 60% or even 80%, and that says it must make changes to its building to be able to increase its productivity. My understanding is that it would not be eligible for this. Has this measure been assessed in a context where the goal, first and foremost, is to increase the productivity of our businesses in Canada? How was this analysis done in terms of the 90% threshold?
Mr. Baylor: I think that, to answer this question, we need to look at the slightly broader context relating to immediate expenditure commitments.
Essentially, what the government is trying to do, particularly in the context of the recently announced Productivity Mega Deduction, is to introduce a broader measure. We are now talking about roughly two thirds of businesses’ investments, including in the manufacturing sector in particular, and in general. But overall, we are talking about two thirds of investments that would be recognized as an immediate expense.
The main general exception is buildings. This applies to everyone. Buildings known as class 1 and class 3 — the more structural buildings, if you like — do not qualify for immediate depreciation. Broadly speaking, a third of them are not eligible. They benefit from an accelerated rate under what is known as the AII. This is a rate increase in the first year, but obviously, it is not as generous.
Now, as for the reason for this, I’d say there are two. Firstly, these are assets with a much longer useful life. As is the case in the United States, this type of asset is not included.
Generally speaking, one must compare with the largest. What we said was that, for the manufacturing sector, we will go even further precisely to encourage them, to give a chance to those who invest 90%. We went a little further, but we decided to draw the line there. Well, “we decided” — that is to say, ultimately, the government based its decision on this threshold, recognizing that, generally speaking, once again, structural buildings are not eligible for immediate expensing.
Senator Hébert: Thank you for your reply, but I remain convinced that, in the current context, we should not take the United States as a model, but rather strive to surpass them in tax matters, especially as we know that in the United States, there have been massive tax cuts for businesses and deregulation that boosts competitiveness in attracting investment. Of course, Canadian values will remain assets that make the country attractive to certain businesses.
I would like to discuss the deferral of tax on investment income for companies, for fiscal year purposes. Once again, when we consider all of this within the context of our tax system as a whole, has there been a global comparative analysis to determine where the Canadian economy stands in terms of tax attractiveness for businesses? This is a very important question at the moment. When we take such measures, do we have a benchmark or a comparative analysis to determine where Canada stands, and what our strengths and weaknesses are?
Mr. Baylor: I’m not sure which measures you’re referring to.
Senator Hébert: I am referring to the measure to defer investment income tax for companies.
Mr. MacEachern: This is an anti-avoidance measure. Unfortunately, I do not have those analyses. It is simply to tackle tax base erosion —
Senator Hébert: You are telling us that corporate tax deferral . . . . I understand that; that is the aim of the measure, but when we take such measures, do we analyze Canada’s overall competitiveness in terms of corporate taxation? By introducing more restrictive measures, are we not in the process of eroding our tax competitiveness? That is what I wanted to know, and whether or not you have any analyses on this point.
Mr. MacEachern: No, it is an anti-avoidance measure targeting private companies and investment income. So, a separate policy applies to this income as compared to the income of active businesses, for example.
Senator Galvez: I am also interested in hearing the details regarding —
[English]
— how much value for our money and how much the fiscal risk is. Bill C-31 introduces very significant public expenditures and financial incentives for individuals, business and industry. I am interested in how you coordinated and evaluated the two departments. How much are all these measures, and in which proportion will they generate long-term greater revenues so that we have the value for our money?
Did Finance Canada and the CRA jointly assess the risk of tax avoidance, administrative complexity but also unequal access to this new incentive? How did you proceed?
Mr. MacEachern: I can answer some of those questions.
Generally, the CRA and Finance are often in touch on tax matters, including tax integrity concerns and data-sharing information, et cetera. A number of these measures were made or proposed in consultation with the CRA.
Senator Galvez: What is your prediction? How much will we get back after these measures?
Mr. MacEachern: There were two tax integrity measures with a physical costing attached to them that were published in Budget 2024 and Budget 2025. The first measure, the manipulation of bankrupt status, was estimated to save $510 million in revenue over five years.
The other measure, the tax deferral through tiered corporate structures — which we just discussed briefly in Budget 2025 — estimated that it would raise $540 million of revenue. The other tax integrity measures in the bill do not have fiscal costs attached to them that were published in the budget, but these costings would have been done based on data from the CRA and information that the Department of Finance obtained from the CRA.
Senator Galvez: Have you included in these costings and predictions the changes that will come? I don’t know how many years you’re predicting this for. For example, we’re going to construct several pipelines, but all reports are saying these will become stranded assets in the next 5 to 10 years. Have you included the stranded assets’ potential, such as what we are also expending after extreme weather events? Have you included those in your cost analysis?
Mr. Baylor: Taking a bit of a different tack, again, it’s a bit of a broader question than what is in Bill C-31 here. Going back to the productivity super deduction and the productivity mega deduction, essentially, the government did publish both in the budget — when it comes to the productivity mega deduction in the backgrounder — a bit of the economic impacts of putting in place these measures. In Bill C-31, the most significant measure is what we were discussing earlier, which is immediate expensing for manufacturing and processing buildings.
If you turn to page 88 in the budget, it looks at the whole productivity super deduction at the time, but it essentially measures on average. Again, this is going beyond Bill C-31. It provides support of about $2.7 billion per year, and the estimate is that this will crowd in capital investment, which is what you’re referring to, and generate economic output of $9 billion annually over the next 10 years. That gives you a bit of a sense of the kind of economic activity that you might expect.
These numbers were refreshed and updated when the productivity mega deduction was announced. If you refer to the backgrounder, you can have that information as well. This is going a bit beyond Bill C-31 at this point because we’re talking about the one measure for manufacturing that’s in this bill.
[Translation]
The Deputy Chair: I have long been interested in the automated generation of tax returns for the most disadvantaged, those who need the support of society as a whole. I note from tab (b) of the summary of Part 1 that certain changes have been made. I shall now give Mr. Leblanc time to take his seat.
Here is my first question, Mr. Leblanc. Can you explain to us what has been changed as a result of these amendments to the act and what impact this will have on the ability to register and identify those Canadians who are among the most vulnerable in our society?
Mr. Leblanc: Thank you for your question. When we talk about automating benefit payments, we are actually referring to two measures. One of these is included in this bill, as it contains a key provision: the pre-filling of tax returns. Perhaps my colleague from the CRA could explain this in more detail.
What this bill provides is another tool for the agency, and it really is about giving the agency the right or the discretion to file a tax return on behalf of certain low-income individuals who are not liable for tax — that is, those with a straightforward tax situation — to provide them with a preliminary assessment and give them time to confirm or correct anything. After 90 days, if that person has not responded, the agency will file the return on their behalf. It is this aspect that is contained in this bill.
In some cases, in order to pay benefits, the agency would need to request additional information, such as civil status details. These two main measures were announced a year ago, but it is the second one that requires an amendment to the Income Tax Act, as proposed in Bill C-31.
The Deputy Chair: This actually applies particularly to the gathering of information, but how will the agency be able to identify these Canadians, most of whom are often homeless? It is not easy to identify these people.
[English]
Adnan Khan, Director General, Individual Returns Directorate, Assessment, Benefit, and Service Branch, Canada Revenue Agency: To respond to how exactly CRA would identify people who are in need of these benefits, when we start with the initiative, once Royal Assent has been received, we’ll target the population that we know about and that we have enough information about, so we can file a return on their behalf with confidence.
That, of course, leaves out the population you talked about, which is perhaps unknown to the agency and about which we don’t have visibility. On that front, we’ve been doing a lot of work through our outreach, community partners and other government agencies.
The CRA has a community volunteer income tax program that helps us identify people who are currently not interacting with the tax system. That’s the avenue we continue to take to identify more and more Canadians to bring them under the benefit umbrella.
Senator Cardozo: I want to pursue the same issue that the deputy chair just talked about and that I raised in my first question.
If there’s time, I’d like to talk about the hydrogen sections too.
I’m wondering, when you’re identifying certain aspects and certain people, whether down the road — hopefully, sooner rather than later — we can have auto-filing for everybody, because it seems to me that an employer, an investment company, a bank or a charity all file information about individual X with you, so you have that information ahead of time.
It seems to me that, with the click of a button, you could send individual X a draft of their tax return, and they could then verify it or add any other information. Is that something we can be looking forward to, down the road?
I totally agree with what is being done now with these measures, but it seems to me that we’ve opened an interesting door here.
Mr. Leblanc: I’ll start and see if my colleague has anything to add.
What you see here is a focus on getting benefits to people who need them most. That’s an underlying objective that the government has, and you can start in different ways. This is a foundational part of it. That’s part of it.
We can talk about prefilled returns because that’s the idea for people with simple situations: to allow them to review the information they have and correct or add to anything they want, but allowing them to confirm.
As we go forward, one thing about the Canadian tax system — if you compare it to other tax systems in the world — is that we have many measures that allow people deductions and credits that serve different economic and social objectives that governments have chosen to put in place.
In those measures, we offer people many choices that aren’t always present in other countries. Many of those choices involve the ability of couples to either pool or transfer amounts. You don’t see that in all countries.
What does it do? It gives Canadians more choice and flexibility to make maximum use of these measures. It also makes things less straightforward from the perspective of automating tax returns.
What you have here are two important measures building on what the CRA has already done with an important focus of getting benefits to those who are entitled to them.
Senator Cardozo: My question is more about whether, down the road, we can we go to something more automatic for everybody.
The other thing that occurs to me is that, when we file, CRA goes through our material and tells us where we’re right and where we’re wrong. Maybe they can do that before we file rather than afterward. Could we not do that ahead of time?
Mr. Leblanc: Many things can happen in the future; this is the focus of the government right now.
Senator Cardozo: Mr. Khan, do you have anything to add?
Mr. Khan: Yes. Conceptually, what’s being described is that, once you have built the infrastructure, you can incrementally add more deductions or credit to whatever solution CRA provides to the first tranche of 1 million, which we intend to do next year. Conceptually, it’s possible.
As my colleague described, the complexity of the Canadian system — and the fact that we tend to deliver social policy objectives through the tax system — creates many challenges that will have to be visited.
Senator Cardozo: Thank you for that. I appreciate that discussion. I’m a fan of incrementalism if we incrementally move in a good direction. Thank you for that.
Senator Ross: I’m interested in some clarity on the implication of the deferral of tax on investment income resulting from the use of tiered corporate structures that have mismatched year-ends.
What assumptions were used to come up with the increased revenue predictions of $540 million over five years? I understand that’s pretty front-end loaded as well.
Mr. MacEachern: Sure. The way the planning works is that investment income is taxed at a high corporate rate. This is investment income earned by a private corporation. It essentially mirrors the highest personal income tax rate on that investment income. The rules are intended to discourage a high-net-worth individual, for example, from earning their investment income in a private corporation rather than earning it personally.
However, the higher surtax is refundable. So, once the investment income is distributed to the individual shareholder, it is refunded to the corporation in order to achieve integration and ensure that, essentially, they are left in the same place as they would have been if they had earned the investment income directly.
The way the planning works is playing on the timing of the refund. So, essentially, it is refunding the tax on a dividend that’s received by another corporation that has a later year-end.
For example, if a corporation paid a dividend on December 31 to a holding corporation that had a December 30 year-end, they would obtain a deferral of 363 or 364 days because the payer corporation would get the refund, so they would not have to pay the high tax on the investment income. Then the liability would be deferred for a year to the recipient corporation, and this can be continued. If you have large amounts of refundable tax earned on investment income earned by private corporations — in this case, $470 million of tax being deferred due to the mismatch of year-ends and the staggering of year-ends in a tiered corporation structure — this measure would accelerate that tax so it would end that deferral advantage. These are anti-deferral measures to begin with, ending the deferral advantage that can be obtained by staggering year-ends in a tiered corporate structure, and essentially ensuring that the tax is payable up front in year one by the first initial payer corporation. That’s what the budget costing is based on: It’s ending the deferral that’s currently available using those structures.
Senator Ross: Corporations would feel that this is a legitimate tax strategy. You used the term “playing on.” Can you give me some clarity there as to how this compares to other jurisdictions?
Mr. MacEachern: I’m not sure. That’s a good question. Other jurisdictions are different. I am not a U.S. tax expert, but in the U.S., often they have flow-throughs, essentially, so they would look through the corporation directly to the individual and tax the income in year one if that corporation has not checked the box, for example. I think it would be consistent with that. Obviously, these rules are more complex because you are looking at every corporation and every dividend.
The rules only apply to commonly controlled corporations, so the payer corp and the recipient corp have to be commonly controlled — more than 50% — so voting control. The recipient corporation would have to have voting control. So if you are a minority shareholder, for example, and you had a different year‑end, the rules would not apply to you.
Senator Ross: Thank you.
[Translation]
Senator Gignac: I would like to talk about the global minimum tax. Unless I am mistaken, in 2023 or 2024, the OECD countries reached an agreement amongst themselves to prevent this tax arbitrage, whereby multinationals move to jurisdictions with very low tax rates. We are all in favour of this principle, but have all the G20 or OECD countries actually reached an agreement? Has the United States explicitly agreed to this, or perhaps, under Mr. Trump, did they decide they were no longer part of it? I note that the implementation date has now been set for December 31, 2025, instead of 2024. How much revenue will this generate, and what are the Canadian Treasury’s expectations?
Peter Repetto, Senior Director, Outbound International Tax Section, Department of Finance Canada: Thank you for the question. I will answer in English.
[English]
The framework for the global minimum tax was agreed to by over 145 countries of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. That agreement was entered into in 2021. Since that time, it has been implemented by more than 55 countries. As you alluded to, the United States is not one of those implementing countries. The Trump administration made it clear from day one, through an executive order, that they were disavowing any of the previous Biden administration’s commitments to the global minimum tax. Subsequently, they threatened to impose retaliatory taxes on any country that sought to apply the global minimum tax to U.S. multinationals.
This all occurred in 2025; so this was all last year. Those retaliatory threats were eventually reflected in a version of the 2025 U.S. budget bill, the One Big Beautiful Bill. Those retaliatory threats prompted the G7 countries to enter into discussions with respect to the status of the U.S. under the global minimum tax.
Senator Gignac: We have experimented with the digital tax movie, such that Canada goes with digital tax, and we’re back up because, otherwise, we are in the penalty box with Mr. Trump. My concern is this: Is it possible for us to repeat that movie and go ahead with this one? By the way, a year from now, we will back up again on digital. What is the expectation of additional revenue from that clause that you have in Bill C-31?
Mr. Repetto: Yes, let me get to the answer to your question. I’m just trying to provide a bit of context so that my answer is clear.
Senator Gignac: I will allow you to answer.
Mr. Repetto: The ultimate result of the G7 discussions was a statement by the G7 countries that they would work on a side‑by‑side system, which would have the U.S. tax rules applying to U.S. multinationals and the Pillar Two global minimum tax applying to other countries’ multinationals. Ultimately, the more than 145 countries of the inclusive framework agreed in January of this year to that system.
So there is now an agreement that the U.S. tax rules will apply with respect to U.S.-headquartered multinationals, including the U.S. version of a global minimum tax. The Pillar Two rules will apply to other multinationals headquartered in other countries, and what is in Part 2 of this bill includes an amendment that would implement that side-by-side system with the U.S. It, in effect, excludes U.S. multinationals from the application of our global minimum tax rules. That takes care of the U.S. objection to the global minimum tax. So now we don’t expect that the U.S. will have any objection to our application of our global minimum tax to our own multinationals and others.
Senator Gignac: Thank you. In Canada, U.S. firms are quite significant. How much money will this clause bring to the federal government per year?
Mr. Repetto: As reflected in the Spring Economic Statement from this year, the estimated revenues from the Pillar Two global minimum taxes were $2.7 billion for the 2026–27 fiscal year and $2 billion for each subsequent year until 2030-31. We have not prepared or released an estimate for any reduction in those estimated revenues resulting from the provision in Part 2 of the bill that excludes U.S. multinationals from the application of our global minimum tax. The reason for that is because there is a particular rule in our global minimum tax that was going to apply with respect to U.S. multinationals, and that’s known as the undertaxed profits rule, or UTPR. There was already a lot of uncertainty as to how much revenue we could collect from the UTPR. That’s because it depends on a variety of factors, including the number of other countries that implement the global minimum tax, since essentially we were going to have to share the global minimum tax revenues with respect to U.S. multinationals with other implementing countries.
Given that uncertainty, we have not yet prepared an estimate of any reduction in revenues resulting from the provisions in Part 2 of the bill, and we’re awaiting further data and analysis before doing so.
Senator Gignac: Thank you very much.
Senator MacAdam: I want to continue some of the discussion around the immediate expensing around manufacturing. Since Bill C-31 is so connected with the productivity mega deduction as well, some of my comments will touch on both, so just bear with me.
If you consider Bill C-31 and the announcement of the productivity mega deduction, not all investment is treated equally. Businesses investing heavily in buildings, manufacturing plants and real property won’t get the same permanent benefit as those investing in machinery, equipment and technology. For businesses, this can create a bit of angst with regard to whether they want to build versus buy or lease versus construct. I’m wondering why plants were left out. I know we’re talking about the future with the productivity mega deduction, but even with the announcement, there is an intention not to make those permanent but to keep them temporary.
Mr. Baylor: It goes back to my earlier comment that we are looking at long-lived assets here when you talk about buildings. Of course, there is a cost associated with all decisions that the government ultimately has to weigh. It could have been a decision to go there, but it is weighing those different factors. The other point is that, just from a competitiveness perspective, when comparing two countries, like the U.S., with these measures — I think there was also an earlier question by your colleague about competitiveness — I’ll just note that the marginal effective tax rate in Canada is significantly lower now than the U.S. taking, again, the productivity mega deduction into account. I recognize that we’re getting away from Bill C-31 here, but that’s okay. You are looking at a 6.4 marginal effective tax rate in Canada. That’s close to 10 points below the U.S.
The notion is that, because of the long-lived nature of these assets, there are several considerations that the government has to weigh, taking into account competitiveness, that with the generosity of it generally and the overall very competitive position of the economy, that was where things landed.
It is tough for me to say more than that. Obviously, there are a number of things that go into what the government chooses to do.
Senator MacAdam: To make buildings a permanent expense option, do you know what that would cost?
Mr. Baylor: I guess it would be extending, more or less, what is there, although there would probably be a phase-out. We would have to look at that, but I think you can see from the measure, you are roughly in the $250 million a year. Now, that’s temporary. That’s probably a bit of an overestimate of what happens when it would be permanent, so I would expect it would be somewhat lower than that. But the level is, to some extent, maintained because it is permanent so there are always additional deductions.
To be clear, this is just for the manufacturing and processing buildings that we’re talking about in Bill C-31. Of course, if you were to do it for the whole economy, you are obviously looking at several billions of dollars.
Senator MacAdam: Thank you.
[Translation]
Senator Hébert: I would like to continue on the subject of the global minimum tax.
If I understand correctly, Mr. Repetto, you have not taken into account the exemptions for U.S. companies in the estimated $2.7 billion in revenue. Have I understood correctly?
[English]
Mr. Repetto: That is correct.
[Translation]
Senator Hébert: As my colleague Senator Gignac pointed out, it is still a significant proportion. So, do we have any idea what proportion of the $2.7 billion dollars this represents, or not?
Mr. Repetto: I’ll leave it to my colleague to answer that question.
David Messier, Director, Policy and Analysis Section, Tax Policy Branch, Department of Finance Canada: Good morning, I am David Messier from the International Taxation Section.
As my colleague has pointed out, the government has not, at this stage, published a breakdown of the estimate. We have simply published an aggregate figure in recognition of the difficulties and the uncertainty surrounding the margin of error associated with this type of estimate.
This is a new tax, and we do not currently have much information on its tax base. The taxpayers and companies concerned are only just completing their first tax returns. Consequently, the margin of uncertainty is still quite significant, so the government has not published anything more precise than this overall figure.
Senator Hébert: Thank you.
I understand that these are discussions that need to take place because our tax laws were drawn up at a time when companies had a fixed registered office and were not spread out all over the place.
At this stage, have we examined how this will affect our tax competitiveness compared with our neighbour to the south, precisely because it gives American companies a very, very clear tax advantage? Have we analyzed these impacts and how to counterbalance them? Are there measures that would enable us to counterbalance this in order to attract investment and avoid being at a disadvantage?
Mr. Messier: Thank you for the question.
Those are issues that worry not only Canada, but also most of the countries that have adopted the pillar two rules. It’s about figuring out the extent to which they can stay competitive in a level playing field, in terms of American companies and multinationals from other countries.
The OECD has done some analysis, but again, the level of accuracy is quite low, because information is hard to obtain.
The expectation is a certain degree of equivalence in tax treatment vis-à-vis the U.S. rules. The U.S. has its own minimum tax system it applies to its own multinationals. The expectation is that there will be a certain degree of equivalence between the U.S. rules and the pillar two rules, the ones in place in Canada.
A more in-depth review of all the OECD countries will be undertaken in the next few years to make sure that is the case. If concerns persist afterwards, the OECD will again hold discussions.
[English]
Senator Galvez: It is my understanding that the amendment removing bankrupt corporations, trusts and partnerships from the exception to the debt forgiveness rule is intended to close a tax loophole.
However, for some companies with significant asset retirement obligations, or AROs, such as mines, gas wells, landfills and industrial facilities that hold contaminated sites, it may create some unintended consequences. Did the department assess whether removing these corporations from the debt forgiveness exception could reduce the financial capacity of insolvent firms to complete environmental remediation obligations?
Mr. MacEachern: Thank you for the question. The short answer is yes. The way the rules would work under the proposal is that, essentially, all corporations, partnerships and trusts that have their debts forgiven or settled for less than the principal amount would be treated equally and would be subject to the same rules.
Generally, the policy rationale of debt forgiveness rules is that if you have borrowed money, for example, and you’ve incurred tax expenditures — tax losses, for example — and then the debt is forgiven, those losses are essentially ground down or not recognized for income tax purposes. That is because you never really incurred the expenditure, since the debt was forgiven. Therefore, for tax purposes, we don’t recognize that as an economic expenditure.
Under the new rules, in your example, if you had a taxpayer with significant reclamation liabilities or other environmental liabilities, et cetera, and they were insolvent, and their debts were forgiven, for example, the tax attributes that were generated with the debt would not be recognized, essentially. They would be reduced. To the extent there is any balance left over, under the rules, there is a half-income inclusion, and there is relief for that half-income inclusion. There is an insolvency deduction — as we call it — to shelter any income that’s included in an insolvent debtor’s taxation year to provide relief in those examples. That is so that the application of these rules never, essentially, worsens their insolvency. It doesn’t add any additional tax debts to them.
Senator Galvez: Thank you.
[Translation]
Senator Carignan: I have a question about the cancellation of mineral rights or exclusive exploration rights that have been granted, further to Division 14 of Bill C-31. It empowers the minister to cancel exclusive exploration rights — powers already granted or likely to be exercised. To my mind, that’s an extraordinary power.
Why is the minister being given such extraordinary powers, allowing them to take rights away from companies that have made investments, sometimes even without compensation? Where does that come from? Could the measure be extended beyond Nunavut, to other territories?
Mr. Coulombe: Senator Carignan, I believe you’re referring to Division 14 of Part 4. This morning’s technical briefing covers parts 1, 2 and 3. You’ll have an opportunity to ask your question when we discuss Part 4.
Senator Carignan: My other question has to do with the Defence Investment Agency. Is that off-topic as well?
The Deputy Chair: Yes.
Senator Carignan: My apologies. Someone else can have my time.
Senator Dalphond: Mr. Chair, let me start by apologizing. I had another engagement.
I wanted to ask the finance officials a question, and I hope this isn’t off-topic. I think one of the government’s goals is to maximize Canadians’ ability to invest in Canada and even to bring investment back to Canada.
I’m sure that, like me, you’ve met representatives and people who sell mutual funds and exchange-traded funds who say that, because of tax advantages down south, some $300 billion goes to the U.S. instead of staying in Canada. Is that something you’ve studied when you’re making policy? How do you think the budget can help bring that investment back to Canada, investment that belongs to Canadians but is located in the U.S.?
Mr. Leblanc: Good morning, senator. I’m not sure that I’m the right witness to answer that. It’s really a bit . . . . We are here to discuss the content of parts 1, 2 and 3 of the bill. We can’t comment on potential measures. I’m sorry.
Senator Dalphond: Do the potential measures have any incentives for this kind of thing, or is that not covered in the parts we’re looking at?
Mr. Leblanc: We’ll have to see. I can’t comment.
The Deputy Chair: Is one of your goals when making policy to ensure that tax policies are attractive and, above all, fair?
Further to Senator Hébert’s question, are there any studies that compare our tax measures and those of our main partner, the U.S.? I am well aware, however, that the overall environment is different, beyond the taxation component. For instance, American companies spend an astronomical amount on employee health insurance. Do we have more of a macroeconomic analysis, so we can make sure that our tax system is fair, effective and competitive?
This doesn’t relate directly to parts 1, 2 or 3. It’s more about the big picture and the work that needs to be done to help lawmakers make good decisions.
Mr. Leblanc: Thank you for your question. You raise some good points. In the advice we provide, we try to find . . . because ensuring competitiveness and fairness is very important, but so is simplicity. Our colleagues at the Canada Revenue Agency, or CRA, have to administer the measures.
There’s often a push and pull between those factors, so we try to find a balance, while taking into account current challenges. We then provide advice. That’s the general framework we follow.
[English]
Senator Cardozo: This is a very general question. It is about the sections dealing with hydrogen production. I am really intrigued by how you develop these sections and measures. I’m quite new to understanding the hydrogen industry, as the industry itself is very new. My sense of it is that you have certain measures in place that were in place previously, and you are fine-tuning it now.
My question is fairly general. What are you getting at here? More importantly, what’s the starting point of how you decide what very precise measures you need to take in an industry that is developing so fast that you will probably need to fine-tune it again in the next year or two. I’m interested in how you, as Finance Canada and CRA, develop tax measures of a new and developing industry.
Mr. Baylor: You framed it fairly well. I can expand on that and then touch on the measures.
The clean hydrogen investment tax credit, as you have indicated, is a measure that was announced a number of years ago, refined mostly through Budget 2023. Essentially, it provides an incentive somewhere between 15% and 40%, depending on the cleanliness of the hydrogen.
What you are getting at is — and you are absolutely right — that there are several pathways that one can use to produce hydrogen. There is a key question as to what types of pathways are eligible under this measure and then the level of support.
The approach the government has been taking is to identify the key pathways that are being pursued. Initially, there were two key pathways: production of hydrogen through the electrolysis of water — what we generally referred to as green hydrogen — and then through the reformation of natural gas with CCUS — what we referred to as blue hydrogen. Those were the two key pathways that were being promoted.
As you point out, at the time, the government made the statement that we would explore, potentially allowing other pathways as things progress. Then, this is exactly what has happened.
People came to the government, came to us and said, well, there is this alternative pathway, which we refer to as methane pyrolysis, which is essentially similar to taking natural gas, but, instead of capturing the CO2 that’s produced and putting it underground through CCUS, it uses a different process.
I won’t get too technical, but it heats it. Then no oxygen is needed, so the carbon is basically extracted and produced as a carbon black. You can extract the hydrogen. Then you have a by‑product referred to as carbon black, which is its own good. It can have its own value and can sometimes be used productively in other products. It’s an avenue now.
It is still emerging as a technology. Government was approached and asked: Can you provide support for this? This will allow experimental projects in the short-term. If this evolves in the right way, then, in the long term, the support will be there. That’s the mindset.
My last comment is that the idea is still going forward. We continue to look at these avenues.
Senator Cardozo: I see a combination of taxing a business as you would tax any business, but for the reasons we tax businesses — and we won’t get into that too much — but at the same time, you are trying to provide incentives for this industry to grow because we want the industry to grow as an alternate source of energy, and we want it to be competitive with other countries. You are balancing all of that. How do you balance that?
Mr. Baylor: Essentially, as you’ve indicated, you tax a business when it is profitable and has income, as you do with all other businesses.
This incentive is an investment tax credit. You will note that all of the clean economy investment tax credits are refundable. Even if the business doesn’t have income and isn’t paying tax, they would still receive support from the government as a transfer rather than a reduction in tax. That’s why these credits were made refundable. Not all, but a number of these businesses are in the early stages and are not necessarily profitable, so the government chose to support them.
You’re suggesting there are different ways to do that. You can do that through the tax system. You can do that through government programs. In this case, the government chose to do it through taxation.
[Translation]
Senator Hébert: I’d like to follow up on the discussion about Canada’s tax competitiveness, in relation to some of the measures that have been introduced in the legislation we’re examining today, but also the broader context. As we know, the government is focused on major projects right now, to make Canada more agile and more competitive in a number of ways, to build the economy. As far as that desire goes, our tax system is a major component. What I’m hearing from you this morning — and this may not be a question for you — is that, in your respective roles, when you examine tax measures, you aren’t in the habit of considering ways we could become more agile or stay competitive. In your answers, you said that the threshold had always been 90%, because that’s where it’s been traditionally. I don’t see that same philosophy being applied in other departments and agencies looking to become more agile and competitive. Currently, no such directive or guidance exists when tax measures are being developed.
Mr. Baylor: I’m glad you asked, because there may have been a slight misunderstanding.
My apologies if this wasn’t clear, but it’s quite the contrary when it comes to competitiveness, particularly as regards corporate income tax. We take a global macroeconomic framework, and the government regularly publishes that. It’s the indicator we use to aggregate and communicate the information. I’m referring to the marginal effective tax rate, or METR. We take a broad look at the impact of various measures. We don’t look at all of them, because obviously, a model can’t necessarily factor in everything, but the bulk of business tax measures are reflected in the indicator. We compare it with similar measures and effective rates in other countries. The government publishes that analysis.
As I mentioned earlier, with the Productivity Mega Deduction — again, this is beyond Bill C-31 — it includes some of the measures here. We talked about the immediate expensing measure for buildings. When you take it and the Productivity Mega Deduction into account, Canada’s METR falls to 6.4%, which is well below the U.S. rate — 16.9%, by comparison. Before the Productivity Mega Deduction, Canada’s rate was at 13%, so it has a major impact. Again, the indicator takes into account the broader business tax system. I hope that clarifies things.
Senator Hébert: Not entirely, but it does reassure me. That’s good. Thank you.
Mr. Coulombe: Another thing that’s important when businesses are making investment decisions is certainty around the state of law as regards taxation. Bill C-31 contains a slew of technical measures that were announced in 2022, 2023, 2024 and 2025. Canadians and industry were consulted, so the fact that this bill finally puts those technical measures in place, I think, contributes to a clear rules-based system for everyone. It’s a small step towards making Canada’s tax system much more competitive.
[English]
Senator Pupatello: My question may be for Mr. Leblanc in response to some comments he made earlier.
In answer to Senator Forest’s questions around the automatic deductions and submissions of income tax and how this is a sort of slow step towards getting help for the people who need it through tax measures, you mentioned that, in comparison to other jurisdictions, Canada actually does very well in offering these kinds of supports through taxation. Can you give me some idea of those comparisons? To whom? Is it to the G7 that you’re comparing Canada to? How exactly do we compare to other countries in tax credits or various supports for people below various levels of income?
Mr. Leblanc: Thanks for the question, senator. I was making the statement pretty generally. One aspect of the question featured quite a few of our tax deductions and credits. Our tax system is based on the individual. We’re not one of those countries, like the U.S. or France, where couples file jointly.
That said, there are several measures, like the medical expense tax credit, where you can pool expenses for yourself, your spouse and your dependents, such as your children. The same goes with the charitable donation tax credit.
For the comparison, in general, you can look at countries with fairly similar tax systems, like the U.K. and Australia, which are based on the individual. If you look at those, you see the ability to either pool amounts or transfer amounts. We do not have joint filing, but couples have the ability to take advantage of certain measures together. That’s what I had in mind.
Senator Pupatello: You are qualifying your answers now.
Mr. Leblanc: No, I’m just elaborating on them.
Senator Pupatello: Is there a standard that we could search? If we are far ahead in terms of supports for people below a certain level of income, that’s great news. But I’m not sure the public is aware that we have that kind of environment in Canada. I’m just wondering if there is a book or something that you check to say, “Here is our standing on these measures.” Do you do the same thing for the business community, where we’re trying to catch up? We have a number of these measures, like the super deductions and like the research tax credits, for example, where we used to be well ahead of our competitors in the G7 on such matters. We’ve fallen behind. Suddenly, with a few short steps and a couple of budgets, we’re jumping ahead again. Who’s doing that level of comparison across our competitors? Can you tell us if there is a standing? Are we first in line or second in line on these various things?
Mr. Leblanc: I can only speak to the individual side. I wasn’t making the statement specifically with respect to support for low-income individuals. It was a statement more about pretty broad-based tax deductions and credits. If you take the two I just mentioned — the medical expense tax credit and the charitable donation tax credit — those are two examples that are generally available, and both are claimed by several million Canadians.
Taking all of this and putting it into a single measure is difficult. We have a complex economy and a complex society, so it’s not surprising that we have a fairly complex tax system when comparing across countries. Again, whether it’s qualifying or elaborating, hopefully, that adds some more context.
Senator Pupatello: For example, this charitable donation tax credit is at 17% for Canadians. What’s the going rate for other countries on that measure?
Mr. Leblanc: Just to take the charitable donation tax credit, you get 14% on the first $200. Above $200, it depends. If you’re in the first of the four brackets, you would get 29% federally. If you’re in the top bracket, with a taxable income above roughly $255,000 in 2026, you would get 33%.
If you compare that to the U.S., only those who itemize their deductions, which is about 10% of the population, can actually claim their charitable donations deduction. For those who don’t itemize and who claim the standard deduction — that’s about 90% of Americans — only a very small charitable donations deduction can be taken; it’s quite limited. Again, that’s only picking one example. Our tax treatment is more generous there.
Senator Pupatello: Thank you.
Senator Ross: I’m always interested in anything that talks about simplifying and streamlining, like harmonizing the qualified investment rules for RRSPs, TFSAs and so on. Will these encourage new investments in small business through those plans? To what extent? What are your predictions? Also, as a senator from New Brunswick, I’m interested in how these new streamlined, simplified and harmonized rules will dovetail with the small business investment tax credit program that New Brunswick has.
Mr. MacEachern: Thanks for the question on the measure to simplify, streamline and harmonize the qualified investment rules for deferred plans. Some of the proposed amendments would improve the coherence of the rules and simplify the rules for investing in a small business. For example, under the current rules, there’s a registration requirement. That would be replaced with a new category of qualified investment under the proposals in Bill C-31. Yes, we think that would simplify the process for investing, or we expect that it would simplify it.
Regarding the question about the New Brunswick small business investment tax credit, I’d have to get back to you on that. Unfortunately, I don’t have an answer handy.
Senator Ross: With these changes, would it affect them in that way as well?
Mr. MacEachern: Assuming they’ve harmonized with us, with the federal government and the federal Income Tax Act, then, yes, that would be my expectation. Most provinces are harmonized.
Senator Ross: I’d be interested, then, if you could find out how those will work together. Also, are there any predictions as to what kinds of increases you expect in investment in small businesses based on these changes?
Mr. MacEachern: I’m happy to see what I can provide to you in writing.
Senator Ross: Thank you. I appreciate it.
[Translation]
Senator Carignan: I’ll try to ask relevant questions this time. I want to talk about hydrogen, which if I’m not mistaken, has already been discussed. My question is about the process specifically. The methane produced in Canada comes from three main sources: livestock, waste disposal sites — the amount is negligible, in comparison — and the oil and gas industry. I would think the best sector for methane retrieval and pyrolysis is oil and gas. Is that what you have in mind? Do the investment credits mainly target that industry?
Mr. Baylor: Indeed, the idea is to take natural gas, which is extracted, as you mentioned, and to convert it into hydrogen, which is also an energy source. Once it’s extracted, the idea is to remove the carbon.
Obviously, the credit is for clean hydrogen, so it ensures that the carbon — in this case, it’s in the form of what’s called carbon black — isn’t released into the atmosphere.
Senator Carignan: When we were talking about small- and medium-sized businesses . . . . The credit is basically going to benefit the big oil-producing companies or, on an accessory level, the small- and medium-sized businesses they contract work out to. Is that right?
Mr. Baylor: It will be the companies that convert —
Senator Carignan: The methane.
Mr. Baylor: — the methane. It’s the company doing the converting, not the one extracting the natural gas.
Senator Carignan: But it lowers the cost for the company . . . . The credit is mainly for the oil and gas sector. Is that right?
Mr. Baylor: It’s for the clean hydrogen sector. I know what you’re saying. The first source is obviously natural gas.
Senator Carignan: Is there a change in philosophy on the government’s part? Previously, it was wielding the hammer — if you’ll pardon the expression — that is, the carbon tax, using penalties to motivate the sector. Now, the government has lifted the hammer, lifted the carbon tax. It’s using the carrot approach, credits and measures to incentivize the industry to reduce its greenhouse gas emissions. The credit for methane pyrolysis is clearly an incentive.
Mr. Baylor: I can comment on the methane pyrolysis credit. That is indeed the idea: provide this incentive to produce clean hydrogen, something that could really be harnessed for decarbonization.
Incentives do play an important role. As I said earlier, we’re talking about 15% to 40%. It probably won’t be 40% in the pyrolysis sector; it’ll probably fall somewhere between 15% and 25%. That’s what would be expected in terms of an incentive, so it’s important.
[English]
Senator Cardozo: Further on that question and to the questions I was asking earlier about hydrogen, which are set out in section 30 of the bill, I think you said the industry came to you and suggested certain measures. I just want to know a little more about how you make a decision as to what measures to include in the bill. Are you talking to the industry? Are you talking to environmentalists or academics? Do you run a process where anybody can have input? How do you come to the precise figures that you mention in the bill? Do those have the support of the industry?
Mr. Baylor: Generally, this talks to a much larger process, I would say. The Department of Finance — generally, the government — is always engaging with stakeholders and hearing their ideas and obviously making an assessment of those ideas. There are a number of factors that ultimately go into what the government decides to announce as policy. Part of that is our engagement and our assessment. Like I say, there are a number of factors. Again, this is a much larger point, but we’ll look at the different ideas and assess them in various ways. Eventually, some will be adopted by the government and are put forward in the bill.
Senator Cardozo: Have you tested the precise measures that you’ve put in the bill with the industry?
Mr. Baylor: In this case, there’s consultation. On tax legislation, I would argue there’s a pretty rigorous process in that regard, especially for measures like this. We’ll announce it at first and put out draft legislation, but then we consult on draft legislation with the industry. The point is precisely, which I suspect is what you’re getting at, to make sure that this works for the industry, and the industry can provide feedback before that is then tabled in Parliament. This measure did, indeed, go through that consultation process.
Senator Cardozo: Thank you. As you know, at the Senate, we don’t often amend budget bills, so it’s reassuring to know the process you’ve been through to get to the point where you’ve named certain figures and percentages. That’s very helpful. Thank you for that.
[Translation]
Senator Dalphond: The CRA is being authorized to share information with international tax authorities with which Canada has an information-sharing agreement, in a manner consistent with the Income Tax Act. How many information-sharing agreements has Canada signed with other countries?
Robert Demeter, Director General, Department of Finance Canada: Good morning and thank you for the question. To date, Canada has signed 93 international tax agreements.
Senator Dalphond: Is it a standard agreement? In other words, is it always the same agreement that just gets tweaked? To protect information and ensure privacy, in Canada, tax information is handled with confidentiality. Is that the case in all the countries? I don’t know.
Mr. Demeter: The basis for our agreements and most of the international agreements is a model that was developed by Canada and the other OECD member countries. It’s the model that’s been promulgated, the one we’ve been using for years.
Senator Dalphond: Why did the government feel the need to make the amendment?
Mr. Demeter: Would you mind repeating that?
Senator Dalphond: Why did the government feel the need to amend the act if there are already 93 agreements?
Mr. Demeter: With the bilateral agreements between Canada and other countries directly, there are also a few multilateral agreements, which include rights and rules regarding the sharing of information between countries.
One of the recently implemented agreements was a multilateral information-sharing agreement. There was a case before the Canadian courts that raised questions about the interpretation of the implication of the multilateral agreement, which didn’t align with the policy in Canada as it’s recognized and understood in all the other bilateral agreements.
It’s a technicality, but the adjustment we’re making is to align the interpretation of the multilateral agreement with the policy in the bilateral agreements that Canada has.
Senator Dalphond: How many multilateral agreements do we have? One or many?
Mr. Demeter: I’ll have to get back to you on how many we have, but there aren’t many.
Senator Dalphond: It’s a few, then?
Mr. Demeter: Yes.
Senator Dalphond: The idea here is to counter, if you will, a court interpretation that was applied to this kind of agreement, because the courts found that the information wasn’t sufficiently protected. Is that right?
Mr. Demeter: It wasn’t clear. The application, the interpretation of the rule after the court case wasn’t clear. The reason for making this technical adjustment is to bring everything into alignment and allow for an interpretation —
Senator Dalphond: You want to amend the interpretation that the court gave. Was it a Tax Court of Canada decision or a Federal Court decision?
Mr. Demeter: I can get back to you on that.
Senator Dalphond: Perhaps when you follow up, you can provide the reference to the decision, indicate how it created a problem and explain why you want to change the interpretation the court gave.
Mr. Demeter: The reason is to keep the standard policy, that long-standing certainty that’s been in place. Honestly, to respect what was intended . . . . The intention wasn’t to give the agreement another interpretation. That was unexpected, so we felt it important to bring everything into alignment and to return, from the standpoint —
Senator Dalphond: — for both the multilateral and the bilateral agreements, but if you could provide some explanation and the reference to the decision, we’d appreciate it. Thank you.
The Deputy Chair: You can send it in writing to our clerk.
Before I thank the witnesses, Senator Gignac has asked that we go in camera for 15 minutes or so. If everyone is in agreement, I would like to thank the witnesses for their contribution today. It’s greatly appreciated. These are technical issues, but your answers are shedding light on the whole thing.
Honourable senators, we will now go in camera.
(The committee continued in camera.)