FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, March 27, 2001

• 0905

[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I would like to call the meeting to order and welcome everyone here this morning.

As everyone knows, the order of the day concerns Bill C-13, an act to amend the Excise Tax Act. Appearing is Roy Cullen, parliamentary secretary to the Minister of Finance. He will of course be supported by very capable Department of Finance individuals, upon whom we'll probably call as we try to get clarification on key issues related to this bill.

Please proceed, Mr. Cullen. You probably know how this committee works.

Mr. Roy Cullen (Parliamentary Secretary to the Minister of Finance): Thank you very much, Mr. Chairman, and good morning, everybody.

Perhaps you will allow me to introduce a few department officials: Marlene Légaré, senior chief, tax policy branch, sales tax division; Rainer Nowak, chief, tax policy branch, sales tax division; Andrew Marsland, senior chief, operations, tax policy branch, sales tax division; and Brian Willis, senior chief, sales tax division, tax policy branch.

Thank you, Mr. Chairman, for the opportunity to outline the measures contained in Bill C-13 and to respond to any questions you or the committee members may have.

I would like to start by mentioning that many of the measures contained in this bill are an example of successful cooperation between the federal government and the private sector towards achieving our common aim of improving our tax system.

[Translation]

Bill C-13 principally implements measures relating to the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) that were proposed in Budget 2000, as well as additional sales tax measures proposed in a Notice of Ways and Means Motion tabled in Parliament on October 4, 2000.

[English]

These measures are aimed at improving the operation of the GST/HST in the affected areas and ensuring that the legislation accords with the policy intent. The bill also implements two amendments to the excise tax provisions of the Excise Tax Act relating to excise taxes on specific products.

Let me begin, Mr. Chairman, by outlining the proposals contained in this bill that were proposed in Budget 2000. The GST/HST is designed to support the development of Canadian businesses in export markets. A number of measures proposed in Budget 2000 and contained in Bill C-13 are aimed at achieving those objectives. Specifically, these measures relate to the GST/HST treatment of export distribution activities.

Let me take a few moments to briefly summarize each of these measures.

[Translation]

The measures contained in this bill relating to export distribution activities concern registrants engaged in the limited processing of goods for export. Currently, these registrants face a cash-flow cost that arises because taxis paid on the purchase or importation of the goods but no offsetting taxis collected on their export.

[English]

The proposal for an export distribution centre program addresses the cashflow issue faced by low value-added export-oriented businesses by allowing them to use an export distribution centre certificate to purchase or import inventory, or to import customers' goods, on a tax-free basis. This measure will help ensure that the GST/HST does not present an impediment to the establishment of North American distribution centres in Canada.

The bill's second proposal dealing with export activities is with respect to Canadian businesses supplying warranty repair or replacement services. Bill C-13 proposes to extend the rules governing relief from the GST/HST to cover situations where a replacement good is provided under warranty and is exported in place of the original imported defective good—for example, where the original good is destroyed.

This proposal would ensure that the GST/HST does not make Canadian suppliers of warranty repair or replacement services less competitive relative to foreign suppliers when these services are provided to non-residents.

• 0910

Third, Bill C-13 also expands on the exporters of processing services program. This program ensures that the GST/HST does not impose prohibitive cashflow costs on Canadian service providers by their having to pay tax on their customers' goods at the time of importation. This bill proposes to expand the program to allow access to businesses that provide only storage or distribution services for non-residents.

Finally, another proposal relating to cross-border transactions contained in this bill concerns sales of goods delivered in Canada to non-residents who intend to export the goods. The proposed amendment relates to the sale of railway rolling stock to non-resident businesses.

The current GST/HST legislation does not permit the sale of the rolling stock to be tax-free if there is to be any use in Canada of the rolling stock prior to its export. As this restriction does not reflect current industry practice, this bill proposes an amendment to ensure that the use of railway rolling stock to ship goods out of the country in the course of the exportation of the rolling stock itself will not disqualify it from tax-free treatment.

The proposals I have just outlined, Mr. Chairman, are an excellent example of the consultative process between government and the tax and business communities. Discussions on these issues were held with interested parties from all regions of the country. The proposals that resulted from these consultations will improve the operation of the tax system in these important export sectors.

I now would like to turn to an important Budget 2000 sales tax initiative contained in Bill C-13 that will be of significant benefit to builders and purchasers of new residential rental accommodation.

Under the existing sales tax system, tax applies to new residential rental property when the property is acquired by a landlord from a builder, or, on a self-assessed basis, when the builder is the landlord. As a result, both purchaser landlords and builder landlords must finance the tax liability up front and recover the tax over time.

[Translation]

This bill implements the New Residential Rental Property Rebate, which is a partial rebate of GST paid in respect of newly constructed, substantially renovated or converted long-term residential rental accommodation.

[English]

The new rebate will reduce the effective tax rate on newly constructed rental property by 2.5 percentage points, which is the same federal tax rate reduction that applies to purchases of new owner-occupied homes under the existing new housing rebate program.

Mr. Chairman, as I mentioned earlier, in addition to the measures proposed in the 2000 budget, Bill C-13 contains other sales tax measures designed to improve the operation of the GST/HST. Three of those measures are also in the area of real property.

First, this bill proposes a refinement to the existing new housing rebate program that will allow new homes to qualify for the rebate where they are used primarily as a place of residence as well as provide short-term accommodation to the public in certain circumstances. This is the case with many bed and breakfast establishments.

Second, Bill C-13 would address a problem that arises when a consumer who has purchased real property from a vendor and has paid GST or HST subsequently returns the property to the original vendor without having used it. The proposed amendment contained in this bill would place a consumer returning real property in a similar position to a person who returns new goods to a vendor and receives a credit or refund for the GST or HST that was originally paid on the goods.

The third real property measure contained in this bill relates to the sale of land by individuals. Honourable members know that sales of real property by individuals or personal trusts are generally exempt from the GST/HST, provided the individual or trust has not used the property in a taxable business. This bill proposes to ensure that a sale of real property cannot be treated as exempt from sales tax if the seller was previously leasing it to other persons on a taxable basis.

Mr. Chairman, all these amendments relating to real property transactions reflect the government's commitment to ensure that our tax system is fair and efficient.

Bill C-13 also builds on this government's commitment to continue to work towards improving the quality of life for Canadians, particularly with respect to providing quality health care and education.

For example, in the area of health care, this bill proposes an amendment to continue in force an existing GST/HST exemption for speech therapy services that are billed by individual practitioners and that are not covered by the applicable provincial health care plan.

• 0915

With respect to education, Bill C-13 contains a measure that will ensure that vocational training provided in different provinces receives the same GST/HST treatment regardless of the regulatory regime that exists in each province with respect to vocational schools.

A further amendment would add the flexibility for providers of vocational training to elect to treat their services as taxable where their clients are commercial businesses that would prefer to pay the tax and recover it by way of input tax credits.

Mr. Chairman, this government also recognizes the important role that charities play in helping Canadians and in enriching our communities. This bill proposes amendments to ensure that the GST/HST legislation properly reflects the government's intended policy of generally exempting from the sales tax the rental of real property and related goods by charities.

As I stated at the outset, Bill C-13 also contains amendments relating to excise taxes on specific products. Among those specific taxes are excise taxes on automobile air conditioners and on heavy automobiles, which have been imposed since the mid-1970s.

[Translation]

Since 1984, these taxes have been payable by the manufacturer at the time of delivery to an automobile dealer. Payment of the tax is effectively deferred at the time of importation, and on intermediate transactions between licensees, until the sale to an automobile dealer in Canada.

[English]

Several manufacturers have recently challenged the long-standing interpretation and application of these provisions with respect to automobile air conditioners installed in imported new motor vehicles. They are seeking substantial refunds of tax. They argue that the relief provided on importations by licensed manufacturers does not simply defer payment of the tax but permanently exempts these goods from tax.

This is clearly contrary to the well-understood policy intent and long-standing interpretation and administration of these legislative provisions. Bill C-13 therefore proposes clarifying amendments to ensure that there can be no misinterpretation of these provisions with respect to importations as well as intermediate transactions. The retroactive application of these amendments is consistent with the criteria laid out by the government in 1995 in the response to the seventh report of the Standing Committee on Public Accounts.

For nearly 20 years these provisions have been interpreted and administered by both Revenue Canada, which is now the Canada Customs and Revenue Agency, and manufacturers and importers in a manner consistent with the underlying policy intent. The tax charged on automobile air conditioners has routinely been included in the price charged to consumers.

Finally, the amount of government revenue at risk is substantial. It is therefore appropriate that definitive action be taken so that there can be no doubt as to the application of these provisions for both future and past transactions.

Mr. Chairman, Bill C-13 contains one other amendment relating to the excise tax system. This bill provides authority for the Minister of National Revenue to waive interest otherwise payable under the non-GST/HST parts of the Excise Tax Act. This amendment will achieve greater harmonization of the administrative rules under the excise tax system with those under the income tax and sales tax systems, which already provide for this waiver. The amendment will further help ensure fair administration of the excise tax system.

Mr. Chairman, Bill C-13 reflects another improvement to the administration of the tax system. As you may recall, the Prime Minister recently announced the federal government's online initiative, a key element of the government's Connecting Canadians strategy, aimed at making Canada the most connected nation in the world. In the spirit of that initiative, the administration of the tax system has already been adapted to facilitate the interface between taxpayers and the Canada Customs and Revenue Agency in a timely and efficient manner by means of electronic media.

Under both the sales tax and income tax systems, taxpayers have for some time been able to file their tax returns electronically over the Internet. However, the current procedures for doing so, for the purposes of the sales tax, have entailed a pre-approval process. Bill C-13 proposes amendments to streamline these cumbersome administrative procedures and harmonize them with those under the Income Tax Act, thereby facilitating greater access to the electronic filing of GST/HST returns.

• 0920

In closing, Mr. Chairman, the measures contained in Bill C-13 that I have outlined here today propose to refine, streamline, and clarify the application of our tax system. At the same time, Bill C-13 reflects this government's commitment to ensure that our tax system is fair.

I, together with the officials present, would be pleased now to answer any questions you or the committee members may have.

Thank you.

The Chair: Thank you, Mr. Cullen.

Five-minute round, Mr. Epp or Mr. Peschisolido.

Mr. Joe Peschisolido (Richmond, CA): Thank you very much.

I'd like to commend, and I'm sure my colleague, Mr. Epp, would also like to commend, the work done to clarify certain oversights that were in the previous legislation. I think we'll all agree here that there were oversights that needed to be corrected. It's a step in the right direction.

Let me preface my question by saying that I would agree with the steps you've taken in dealing with the oversights. The only new proposal that was brought in, Mr. Cullen, deals with the residential rental property. I think it's a good move. But I would like to ask a question in an area that you haven't dealt with, the overall rental stock across the country.

As you know, there's a shortage of rental accommodation in many parts of this country. There are those within the industry who would argue that it is the tax regime of the federal government, particularly when it comes to laws or tax legislation dealing with rollovers and different treatment on the rental side of accommodation.

Are you looking at any legislation or any proposals in the upcoming legislative calendar to deal with this problem?

Mr. Roy Cullen: Thank you, Mr. Peschisolido. Before I ask the officials to comment and elaborate further, I thank you for the comment with regard to rental housing.

The intent of including the GST provisions here is to create a level playing field between rental housing and another type of housing. Yes, there is a shortage of affordable housing, but it depends where in the country. In some centres there isn't much of a shortage of affordable housing, and in other centres there is.

In my riding in Toronto, for example, there is clearly an affordable housing shortage. The fact that it is mixed creates some challenges in terms of trying to address the issue through tax policy. You will recall there have been a number of measures looked at, but I'm not sure the solutions lie necessarily in federal tax policy.

In the campaign, in our red book, we committed to providing on a cost-shared basis the means to deliver more affordable housing in those parts of the country where there was a demonstrated need. Those discussions are under way with the provinces as we speak.

In addition, when we announced the infrastructure program, there was a provision that would be supportive of affordable housing infrastructure if that priority was expressed and put forward by the relevant province and municipalities. So that flexibility is there.

That position, by the way, was advanced by the federation of municipalities. This committee, in our consultations in the last Parliament, heard many, many briefs on the issue of affordable housing. It was only in the latter days that some meaningful federal income tax solutions really came forward.

Maybe I can ask the officials to comment on what alternatives have been looked at in terms of income tax policy, and whether any solutions lie there.

The Chair: Mr. Nowak.

Mr. Rainer Nowak (Chief, Tax Policy Branch, Sales Tax Division, Department of Finance): Thank you.

I don't work in the income tax area per se, but I have seen some submissions and they continue to come in on the income tax side. It's my understanding that those issues are continuing to be analysed. I can't comment on which specific provisions are being looked at or what may go forward in the future.

• 0925

On the GST side, we responded to an issue that was raised by the builder landlords dealing specifically with the cashflow implications of the GST on builders, and this measure was designed to address that specific issue. I think it has a lot of support from the builders because it does address that issue. It also responds to some of the concerns the builders raised about the disincentives that exist in the various tax structures nationally concerning the construction of new residential accommodation.

Mr. Joe Peschisolido: I must admit, I was somewhat surprised by the response from Mr. Cullen that it's not the role of the private sector to deal with the problem of accommodation. I don't think the problem is exclusively affordable accommodation. Perhaps Mr. Cullen believes that assessment was too harsh, based on his comments.

I think we all agree that at the lower end of the market, there may be—there is, I believe—a role for government to play, but I think it equally could be argued that tax policy is a very efficient tool, not only on the GST side but also on the capital gains side, on provisions for rollovers, to give an incentive for builders, not just to build high-end condos but also to build apartment units for the whole spectrum.

I understand that today we're dealing pretty well with the GST provisions audit. There is not much I can ask a question on here, because I think you're going in the right direction on it. I just wanted to use the time I had to deal with what is, I think, a huge problem that we have in Canada. Our tax code has been somewhat lacking in dealing with it.

Mr. Roy Cullen: Maybe I misunderstood what you said, Mr. Peschisolido, but I don't recall saying the private sector doesn't have a role. I don't recall saying anything even remotely like that.

But I guess it is a complex problem. In Ontario, the province I live in, the provincial government keeps talking about the need for tax solutions when at the same time there are other solutions that we've put in front of them in terms of a cost-shared program—federal government, provinces, municipalities. We've also, through the infrastructure program, allowed that flexibility would be there. Minister Gagliano and his people have been meeting with the Ontario government and provinces on this issue.

One of the challenges you have in terms of tax policy is making sure that the policy is sound, that there is prudence. We've had experiences historically with MURBs and other such instruments that proved not to be our finest hours.

All I can say is that tax solutions are being looked at all the time, but we would hope that some of the provinces would take advantage of some of the offers that are on the table right now.

The Chair: Thank you, Mr. Peschisolido.

Mr. Cullen, in reference to this tax package, what is the cost and what are the benefits? What are the anticipated benefits for Canadian individuals and businesses?

Mr. Rainer Nowak: The only significant costs are changes with respect to the rental rebate, and the ongoing cost of that is projected to be in the range of $40 million to $45 million a year.

The Chair: What type of economic activity do you expect this to generate? How much of your tax dollar are you going to give back in economic growth?

Mr. Rainer Nowak: I don't have that figure in front of me. We have to take into account the income tax changes as well. We did do projections, I think, on the number of units that would be constructed over the next five to ten years.

I can get back to you on that.

The Chair: All right.

Mr. Roy Cullen: I think, Mr. Chairman, that provision was implemented to create a level playing field, to provide opportunities to allow rental housing to come forward, given the fact that in terms of affordable housing, there are some shortages.

• 0930

In terms of developers, I've met with a number of them over the last few years. They argue that if you create tax policies that are favourable to developers, without targeting it—affordable housing, say—those tax instruments would create increased activity in housing. By definition it would include the full range—high end, middle end, and low end.

I've never been convinced by that argument, but there are some who argue it. My own personal view is that if we were going to do anything on tax policy we'd want to target it. I've never seen anything that demonstrates that if you just put out tax instruments it begins to have the cascading effect of creating increases in the inventory of all categories of housing.

The Chair: Any further questions from the Liberal side?

Mr. Epp.

Mr. Ken Epp (Elk Island, CA): Thank you.

I would like some clarifications on a couple of things here. I don't know who among you will choose to answer, or who Mr. Cullen will designate.

First of all, on the air conditioning tax, I don't really understand this. My understanding—and please correct me where I'm wrong—is that right now, before Bill C-13, if I buy a new car and it has air conditioning, I pay $100 tax on top of the GST and on top of all the other taxes I pay when I purchase that vehicle.

So there's a $100 surtax on the air conditioning. Whether I buy an imported car or a domestically manufactured car, I pay that $100 surtax.

I'll give you a case from a couple of years back. I had a car and I said I wanted air conditioning. They said, “Actually, it doesn't come with air conditioning. It's an add-on. We'll install it in the shop here when you car comes in.” Then I paid the $100 tax. It was on the bill.

Now, what is the scoop here? Under what conditions, right now, is somebody able to get air conditioning and avoid that $100 tax? I don't understand that.

Mr. Roy Cullen: Mr. Willis, can you explain that?

Mr. Brian Willis (Senior Chief, Sales Tax Division, Tax Policy Branch, Department of Finance): Yes.

First of all, the tax is imposed at the manufacturer's level, not at the consumer level. So while the dealers show it on the invoice when you purchase a vehicle—and they all do—it is in fact a tax that has been paid at the time the vehicle was sold to the dealer. So it's really not a tax on you directly or on the dealer. It's imposed on the manufacturer. But they show it because it's an easy way for them to pass on another $100.

The second thing is, yes, you're quite correct, this tax has been imposed for 25 years now. All of the manufacturers have been paying it for that entire period of time. But what has arisen is that one manufacturer, followed by a number of others, used a technical provision in the act that really is there to defer the time of payment of the tax from the time when the vehicle is imported to the time when it's delivered to the dealer. They have argued that this deferral is in fact functioning as a permanent exemption. They are about to have their case heard in court.

We've looked at this provision and we've said, first of all, we think they're wrong. But as in any court case, there's a risk that they might in fact be able to demonstrate that the law has a flaw in it. So we've said that is inconsistent with the government's policy objectives in this area and it's inconsistent with the long-standing payment of the tax by manufacturers and the fact that, as you've just cited, consumers have paid this tax.

Were the manufacturers to win the case, they would be entitled to a refund of tax back to, I think, 1994. That's the time period when these refunds were first applied for.

But the question you've raised is exactly the kind of issue that we're concerned about. The consumer has already paid that tax. It's already been passed on. This would amount to essentially a windfall gain for the manufacturers, should they win this case, as well as an undermining of government revenues and the policy in this area.

So what the amendments in here do is clarify that this tax is imposed. They correct the particular provision that the manufacturers have cited. It removes that provision and makes it clear that the tax applies.

Mr. Ken Epp: Are you suggesting that there are some automobile dealers in this country who have a $100 price tag, when I buy a vehicle, that never gets to the government? Is that what you're saying?

Mr. Brian Willis: No. This tax has been paid to the government. It has all been remitted. What is now happening is that some of the people who are manufacturers, or deemed manufacturers, of these vehicles have suggested that this tax should not have been imposed and should not have been paid. They have applied for refunds of this tax.

The amendments in this bill will essentially remove any doubt that those refunds would be payable.

Mr. Ken Epp: Okay.

Mr. Chairman, my next question is totally political. The technical people here can relax. This goes to Mr. Cullen.

What a dumb tax, that air conditioning tax. I've always thought so. I remember way back when they brought it in. They said at the time it was to encourage people not to have air conditioning, because that needs more fuel. Yet I remember reading an article at the time that indicated that it takes more fuel to drive a car with the windows open due to the additional air drag than the small amount that's required to run an air conditioner.

• 0935

You don't put an extra tax on heaters, so why on air conditioners? You don't put an extra tax on big stereos. My goodness, some of these kids have stereos that are totally non-essential, in my view, if you want to look at this as a luxury tax, and that cost much more than an air conditioning system. It's just a stupid tax.

So respond to that, because I'm going to talk about this when this bill comes to the House.

The Chair: Very important comment made by the Alliance member: There are smart taxes.

Mr. Ken Epp: Oh, boy, I'm not sure about that.

Mr. Joe Peschisolido: Mr. Epp misspoke on that one.

Mr. Roy Cullen: It's a good question. I wish I had all the answers for you.

It was brought in many years ago, and you know, I couldn't sit here and tell you it's had the effect that maybe was intended at the time. If you look at it in the sense of a luxury tax, we have excise taxes on jewellery, excise taxes on... If the policy intent at the time was to discourage the use of air conditioners in cars as an energy conservation objective, I'm not sure that's been realized.

There are a lot of taxes on our books that in terms of a strictly disciplined policy rationale may not be there, but we still have the taxes. We generate revenues from them, we need the revenues, and I can't sit here and tell you there's an excellent policy rationale for this one.

Mr. Ken Epp: Well, I agree with that. I also, however, would like to unofficially expunge from the record... that I suggested they should put a surtax on stereos. I mean, it could be construed that way, and that was not my intent. I would like to make sure that's clearly on the record.

I have just a quick question. This is a technical one. I don't know if someone knows the answer.

What is the net revenue of this air conditioning tax to the government?

Mr. Brian Willis: I can respond to that. It was about $143 million last year, according to the public accounts, for the 1999-2000 fiscal year.

Mr. Ken Epp: Thank you. That was the question I had there.

I also want to ask a question about something that's not in this bill and that I think should be.

Mr. Cullen, why doesn't your government respond to the cry from students who want to have their textbooks exempt from GST? You have here a perfect opportunity. You're talking about GST, and application to it, and students in this country are overtaxed. When they have a summer job they have to pay EI premiums even though they don't have a hope of collecting it, since it's against the rules for them to collect. You force them into that. You force them into GST. Millions of dollars of revenue go to the government by charging GST on textbooks to all students, and not only post-secondary students.

Why don't you reduce or remove that GST on reading materials? Have you ever heard the phrase “don't tax reading”?

Mr. Roy Cullen: I guess one could respond in a couple of ways. First of all, any kind of relief on GST sets... There are many, many pressures to eliminate GST on a whole range of products. I guess as a government we've played hardball, in a sense, that once you go down that road you open yourself up to GST relief in just a myriad of ways. We get thousands and thousands of cards and letters on it every year.

I think one should look at what we've done to provide some relief to students. For example, in Budget 2000 and in previous budgets we've consistently increased... the tuition, the spending allowance, the tax credit. We've provided relief on student debt, tax relief on the interest expense, and provisions for elongating the payments of the debt.

• 0940

With respect to EI, student associations were in town recently. The restaurant association has in fact made a proposal to exempt the first $2,000 of EI, the payroll deductions, employer-employee. Students would benefit a lot, because they get a lot of part-time jobs in restaurants. That now is being looked at by the tax department. Frankly, I don't know where it's going to go, but that's something that...

You know, you could argue that this is a disincentive for employers to hire students. You saw the effect of the GST. Of course, many students get the GST rebate. You saw the result of that with the home heating oil rebate.

Mr. Ken Epp: Yes. I guess that paid for the GST on their books.

Mr. Roy Cullen: I do think there are a lot of accommodating measures for students.

Mr. Ken Epp: Mr. Chairman, if someone else wants to ask a question, I would defer to them, but I have more questions.

The Chair: Just be mindful of the fact that we do have another witness. There's also the debate taking place in the House immediately after this.

Mr. Ken Epp: I thought that was it for today.

The Chair: No, we also have Mr. Tretheway speaking on behalf of the Canadian Airports Council.

Any further questions?

Mr. Ken Epp: I have just one more quick question.

The Chair: Go ahead.

Mr. Ken Epp: This is in reference to what's found on page 18 of the bill, and on other pages. There a formula on the exemption of the residential units:

[A x ($450,000 - B)/$100,000] - C

where

A is the lesser of $8750 and the amount determined by the formula

A₁ x A₂

where

A₁ is 36% of the tax

And it goes on and on.

Who lies awake at night dreaming up these things? That seems to me a totally arbitrary choice of numbers. As near as I can figure out, it's based on the cost of building.

Now, we all know that the cost of building varies tremendously across this country. I can put up a building in one of the small towns in my riding for one-third the cost of doing so in Edmonton or Toronto or one of the other major cities. Ottawa is out of sight completely.

So these are very arbitrary numbers, in my view. Where do they come from?

Mr. Roy Cullen: Mr. Nowak, do you want to...

Mr. Rainer Nowak: Yes.

They parallel the thresholds we use for the new housing rebate, which is available to individuals who are purchasing a new house. The way that rebate is structured is that the full rebate of 2.5 points of the tax is given to houses with a value of up to $350,000. Between $350,000 and $450,000 the rebate is gradually reduced, until at $450,000 it is no longer available.

The rationale for that originally, back in 1991 when the GST was introduced, was that the new housing rebate was a measure to ensure that the GST didn't impact the affordability of home ownership. That's why there is a threshold and a phase-out.

Now, when we designed the rental rebate, which is in this bill, we thought it would be simplest if we just paralleled the existing thresholds that exist with the new housing rebate. Generally, these thresholds of $350,000 to $450,000, particularly for rental housing, are quite generous when you compare these with home ownership. In Toronto, for instance, if you're looking at a condominium or even apartments in a highrise, most units, even in the mid-range, are in the area of $200,000 to $250,000.

Mr. Ken Epp: Okay. So your arbitrary numbers here are chosen from the pretty well arbitrary numbers from another application, but there is some rationale behind it.

Mr. Rainer Nowak: On a national average—I mean, we did look at it nationally—$350,000, even in Toronto, would pick up the majority of mid-income new housing.

Mr. Ken Epp: So you did originally look at the costs in the different major areas right across the country?

Mr. Rainer Nowak: Yes. We took a national average and bumped it up for the high-cost areas. So it tends to be somewhat more generous for the low-cost areas.

Mr. Ken Epp: Good.

My closing comment is simply that Erma Bombeck, speaking of pantyhose, said, “One size fits all doesn't”.

The Chair: On that profound note, we want to thank our witnesses very much.

I want to take a quick opportunity to thank Marlene Légaré, Brian Willis, Andrew Marsland, Rainer Nowak, François Beaulieu, Annie Smith, John Bain, and Warren Light. I know these types of bills take a lot of work from the department, and we obviously look to your expertise to give us important answers to, sometimes, even important questions. Thank you very much.

We'll now hear from Mr. Mike Tretheway from the Canadian Airports Council. He's vice-president and chief economist for InterVISTAS Consulting.

Welcome.

• 0945

Mr. Mike Tretheway (Representative, Canadian Airports Council): Thank you very much, Mr. Chairman.

Having been a career professor at the University of British Columbia, I'm used to speaking in 90-minute blocks, but I'll make my comments very brief.

My name is Mike Tretheway. I'm a resident of Richmond, British Columbia. I'm vice-president and chief economist of InterVISTAS Consulting. We're an economic research group dedicated to the transportation industry.

I'm here speaking on behalf of the Canadian Airports Council. Mr. DeSchutter and Mr. Battaglia were not able to accommodate the shift of date from Thursday to Tuesday. They send their regrets.

The Canadian Airports Council represents 23 airports in Canada that account for 91% of Canada's passenger traffic and 98% of its cargo traffic. In 1997, the most recent date, Canadian airports handled 800,000 tonnes of cargo.

The Canadian Airports Council is here today with regard to the export distribution centre program that's part of Bill C-13. The Airports Council strongly supports the creation of this program. We have made an estimate that this program, over a period of roughly ten years, will create somewhere between 50,000 and 100,000 jobs in Canada.

We'd like to very briefly share with you our vision of what this program means.

Canada has a natural geographic advantage in terms of how goods from elsewhere in the world are distributed into the NAFTA economy. If we could envision North America without the border—if this was all Canada, for example—we would find that the overwhelming majority of distribution centres for goods arriving from Europe and Asia would actually be located in Canadian cities.

The border does exist, however, and if we look at the United States, we find that the bulk of their distribution centres are located along the northern tier, in communities on the coast—New York, Boston, Newark, Seattle—as well as inland points, such as Detroit and Minneapolis.

The export distribution program that's proposed here is not going to create an artificial advantage for Canada's communities in establishing distribution centres but is merely removing an artificial impediment through the existence of the border.

The vision we have for use of this program is one of attracting distribution centres for overseas manufacturers who are already producing products and exporting them into the NAFTA economy, primarily the United States. It has not targeted developing major manufacturing facilities. We want to attract high-tech modern distribution centre jobs.

This will be done through the export distribution program, which we believe will be successful in attracting a number of European and Asian companies to establish their new distribution centres at Canadian locations rather than at locations in the United States.

One of the key impediments we had in the past to this is found in the incentives in the existing programs to only distribute products and not add value. Modern distribution centres in fact must add value. Perhaps I can give a few very brief examples.

The fastest-growing segment of the apparel industry is sports apparel. What we're finding today is that people want, say, a Nike sports jersey that might be manufactured in Turin, Italy, or perhaps in some location in Asia, but they want to customize with the local bowling team logo or their name or whatever. The concept we're attempting to pursue is to attract computer, sports apparel, and watch manufacturers to locate their distribution centres in Canada, where we then will add a value of somewhere between 10% and 20%. It may be final assembly of a PC in the installation of software. It may be sewing the bowling team logo onto a previously manufactured article of sports apparel.

We believe the opportunities are coast to coast. My company in particular is working with airports in Vancouver, Hamilton, Ontario, Regina, Saskatchewan, and Gander, Newfoundland. We're also aware of major efforts underway in Calgary, Winnipeg, and Montreal. We believe all of these locations will in fact be successful in attracting new distribution centres that otherwise would be locating in the United States.

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Key to this program is the ability to add value, not full manufacturing but just the ability to add value, on products that are going to be distributed, in the range of 10% to 20%, without the requirement to prepay the GST. These are goods that are targeted for eventual entry into the broader NAFTA economy, primarily the United States and to some extent Mexico.

We strongly support this bill. We appreciate the efforts of the government and members of Parliament in establishing this.

Let me conclude by saying that we absolutely believe that over a 10-year period this will be creating between 50,000 and 100,000 jobs in Canada.

The Chair: Thank you, Mr. Tretheway.

Mr. Epp.

Mr. Ken Epp: Are you saying that the provisions in Bill C-13 address this question satisfactorily and you're just here to cheer “Whoopee”?

Mr. Mike Tretheway: We think this bill is an important part of the development of jobs located around Canada's ports and airports. Without Bill C-13, we don't think we would be able to achieve this.

Mr. Ken Epp: But Bill C-13 gives you what you want?

Mr. Mike Tretheway: Bill C-13 gives us what we want.

Mr. Ken Epp: So you're just here to reinforce it so that nobody amends that away?

Mr. Mike Tretheway: Correct.

Mr. Ken Epp: Okay. Good point. Thank you.

The Chair: There are people who appear in front of our committee to say it's a good bill.

Mr. Ken Epp: I know, and that's very valuable.

The Chair: Mr. Valeri, you probably have a question.

Mr. Tony Valeri (Stoney Creek, Lib.): I do. Can I ask my question now?

The Chair: Absolutely.

Mr. Tony Valeri: Thank you very much, Mr. Chairman.

Thank you, Mr. Epp, for your comments. It is nice to actually have economists and private sector individuals come before the committee to say these are good amendments, this is a good bill, and this gives us what we want. I think what also should be said, though, is that prior to individuals coming before the committee and making those types of statements, perhaps years or months have gone by where private sector individuals have been working together with people in the department and members of Parliament and other individuals in the bureaucracy to bring forward ultimately a better product to a committee for scrutiny.

Ultimately, I think what we have here today is a real example of how tax policy can be used as a vehicle for economic development. In this particular case we've removed a number of impediments.

Because the amendments are quite technical in nature, what I'd like to hear, Mr. Tretheway, in plain language, are the types of experiences individuals like you have had in attempting to attract those companies, going to these foreign countries and selling the vision—the gateway to NAFTA, the gateway to the U.S. market—and the kinds of messages and the feedback you've received. Those really, I guess, would be the real drivers to the change we've seen today.

If you've had any experience with those same people since the announcement was made, how has the feedback changed and what do you see in terms of the prospects? What kinds of companies now looking at the potential opportunity may not have been looking at it previous to these changes?

Mr. Mike Tretheway: I did a stint as vice-president of marketing at the Vancouver International Airport. We were in discussions with a major Japanese auto manufacturer for an auto parts distribution centre that would have served roughly one-quarter of the North American continent, not just Canada but much of the northwest of the United States as well. We pointed out to them a number of existing programs that the Canada Customs and Revenue Agency had for this, but in the end they would have to cobble together a combination of the exporter processing services program with about three classifications of sufferance warehouses and bonded warehouses. It all looked extremely complicated.

They were also particularly disturbed by the fact that they would have had to prepay the GST on goods that were ultimately going to be destined for the United States.

In the end they basically said—it was a very simple message—“This is just too complicated. Yes, maybe it's going to work, but we don't want to have to engage the number of tax accountants that are going to be necessary to make this all work and operate in multiple programs.” They went away and established their distribution centre just south of Seattle, I believe.

Since the announcement roughly one year ago on this, we've actually engaged in active marketing efforts. We now have a number of groups looking at major investments in at least three airports that I'm now working with. They're now saying “This will probably work for us, but show us the goods”, to put it in the vernacular. They're saying, “We need to actually see this bill there before we will commit.” Ultimately, I believe, we'll be successful with this.

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Just to underscore Mr. Valeri's point, we were very actively involved in the consultation process prior to the introduction of the bill. Where we would have been here appearing with a number of proposals for amendments, the consultation process was successful in that we're very pleased with the way the bill ultimately has been introduced.

Mr. Tony Valeri: Just as one final point, do the amendments in Bill C-13 now level the playing field for Canada with respect to what the U.S. and other G-7 or G-8 countries may be proposing with respect to this type of policy?

Mr. Mike Tretheway: The playing field has a lot of rough spots on it, not the least of which is the fact that many U.S. jurisdictions, for example, have significant property tax and other types of incentives. I have to say, this was the primary hurdle on that playing field. This is now going to enable us to engage in marketing and to work with local governments, provincial governments, hydro, and so forth, to smooth out some of the other rough edges. For us in the airports community, this is the removal of the number one hurdle to the development of distribution centres in Canada.

Mr. Tony Valeri: Thank you, Mr. Chairman.

The Chair: Thank you very much, Mr. Valeri. My recollection is that you were very involved in this particular process.

Mr. Tony Valeri: That's correct, Mr. Chairman.

The Chair: You did a great job.

Mr. Tony Valeri: Thank you.

The Chair: Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you.

Partial work was done on this, and different work had been done in actually relieving the importers... This is more in the free trade zone, as we look at it. What happens to the domestic market?

If these places here only deal with export, value added and export, related to a domestic market, serving a domestic market, does the tax become applicable to the whole of the good and added value goods? How does it go? Does it stay within the airport system? If it does leave the export point, and it just enters the domestic market, I don't want to give unfair advantages to someone selling over here, entering our domestic market in order to exempt a tax system.

How does it work?

The Chair: Mr. Marsland, do you want to answer that question?

Mr. Andrew Marsland (Senior Chief, Operations, Tax Policy Branch, Sales Tax Division, Department of Finance): I think the program is very carefully designed to avoid any of those distortions. First of all, it's targeted at businesses that serve the export market, so 90% of the sales have to be leaving the country.

Mr. Gary Pillitteri: It's 90%, not 100%?

Mr. Andrew Marsland: Well, the test is “all or substantially all”, which is usually interpreted in tax law as about 90%. What it means is that virtually all the goods have to leave the jurisdiction. The reason it's 90% and not 100% is that occasionally there's wastage and things like that, and a 100% test is too much of an on/off switch, normally, for a business to meet.

Second, an eligible business that can use the certificate to import goods tax-free can also use it in the domestic market. A domestic supplier is not put at a disadvantage vis-à-vis an importer.

So I don't think it creates those kinds of distortions. Certainly when we went through the consultative process, when we developed the program, we were very much aware of the need to avoid creating those distortions in the domestic market.

Mr. Gary Pillitteri: But my specific question is, do both taxes become applicable within the domestic market? Is it that, with a product coming in, you apply the GST and then the value added—reapply the GST the same as any manufacturer here in Canada?

Mr. Andrew Marsland: Any product exported from Canada is fully relieved of the GST.

Mr. Gary Pillitteri: Yes, I know that.

Mr. Andrew Marsland: The issue here is whether or not you pay the GST on the original importation of the good, to which value-added is added, and then the good is exported. What this does is it relieves the obligation to pay the tax and then seek a rebate of the tax. Since the good is being exported anyway, there shouldn't be a distortion vis-à-vis a domestic manufacturer or supplier.

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Mr. Gary Pillitteri: But what I'm getting at is that we did have already in Canada, I think going back to 1995, a paper trail. If anyone imported goods and made an agreement on tax—let's say 80% would be used in the domestic market and 20% for export—those individuals would not pay anything used in the export version. It did relieve some tax.

This is what it does. It encompasses the whole project, just for export. What changes have occurred? I think we made changes in 1995 and 1996.

An hon. member: Bill C-102.

Ms. Marlene Légaré (Senior Chief, Tax Policy Branch, Sales Tax Division, Department of Finance): Perhaps, Mr. Chairman, I could clarify or add to what Mr. Marsland has said.

I think the member is referring to a program that continues to exist alongside the new programs.

Mr. Gary Pillitteri: I think it was Bill C-102, as my colleague has said.

Ms. Marlene Légaré: We refer to it as the export trading house program. It differs, you're quite right, in that, first of all, that program didn't apply to relieve imports. It only applied with respect to domestic purchases. You're right, those purchases had to be exported, each and every one, in order for the relief to apply.

Under this program, first of all, it does also apply to import tax on importations as well. That's the focus of it, in fact. In that case, if the particular product that is imported ends up not being exported, the relief is still there, provided that—this is an annual test—the entity satisfies the export revenue threshold.

In other words, if over the course of the year they have in fact met the criterion that says at least 90% of their activities are in the export market, then any particular item that was brought in that, for whatever reason, ended up being sold in the domestic market won't cause that particular importation to become taxable after the fact.

So it doesn't look at it on a transaction-by-transaction basis. It's a matter of meeting the eligibility criteria, on an annual basis, to use the export distribution centre certificate in the following year.

Now, should the company prove to have failed to meet that threshold, and indeed their activities in the domestic sales were in excess of the 10%, there are provisions. First of all, the company will lose its ability to continue to, in the following year, use that certificate to obtain relief on the importations.

Second, there are provisions that essentially will recapture the cashflow benefit that the company had obtained by having used that certificate when they didn't meet the eligibility criteria.

Mr. Gary Pillitteri: What is the penalty besides losing the permit for the following year? Are there any other penalties?

Ms. Marlene Légaré: There will be a requirement for the company to add an amount to its net tax, essentially to pay an amount, which, as I said, is there to approximate what would have been the cashflow benefit that it would have received on a sort of monthly basis, which typically would be the frequency with which it would otherwise have had to pay tax. It's required to be added at the end of that fiscal year in which they exceeded the threshold.

Mr. Gary Pillitteri: I think, Mr. Chairman, we'll have to monitor this very well, because it could very well interfere with our domestic market. A product can be 90% to 95% finished and come into Canada, put on an added value of 5%, and then compete within our own domestic market.

This is walking a very fine line, I think. I will want to see this later on to see how it really works.

Ms. Marlene Légaré: Perhaps I can add just one point. When the product is sold in Canada, it is of course still subject to tax on the sale price. So the advantage that had been gained is in relation to the cashflow. They would have otherwise had to pay tax at the time of importation and claim it back by way of input tax credits. But the usual rules in terms of the resale will be taxable.

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So it's the advantage of not having to pay that tax up front and claim the input tax credit that is gained by using the certificate, and the purpose of the penalty for failing to meet the eligibility criteria is to recognize that. It is intended to serve, as you said, to put domestic suppliers on an even footing.

Mr. Gary Pillitteri: Thank you.

The Chair: Sue Barnes, followed by Mr. Peschisolido.

Mrs. Sue Barnes (London West, Lib.): Thank you very much, and thank you for your testimony.

I'd like to follow up on Mr. Pillitteri's questioning a little bit. Can you give me an idea of the timeline, if you were in their current situation, in terms of their cashflow that's affected? I do know that cashflow is very critical to small and medium-sized businesses here. Is this a six-month delay, a one-year delay, an eighteen-month delay?

Mr. Andrew Marsland: It depends on the size of the business, but any business can elect to file on a monthly basis, which reduces the cashflow. It's normally a cashflow problem for businesses who are in a refund position, exporters, or farmers who don't charge tax on their outputs, who obviously have to pay GST on the goods and services they acquire to make those outputs.

Typically, in that case, it could be 30 to 45 days, depending on when they file and how quickly the Canada Customs and Revenue Agency pays the refund.

Mrs. Sue Barnes: We're doing that in 35 to 40 days?

Mr. Andrew Marsland: If they file on the first day of...

Mrs. Sue Barnes: I'd be very happy if that was happening.

Mr. Andrew Marsland: That's certainly my information from the CCRA.

Mrs. Sue Barnes: Is 35 to 40 days what you would anticipate?

Ms. Marlene Légaré: As Mr. Marsland said, that would probably be in fact on the upper end, because there are also the special provisions already existing that permit the deferral of payment of the tax on import.

So when we're talking about the cashflow hit with respect to importations, it can be minimized even below the 30- to 45-day period under existing rules.

Mrs. Sue Barnes: Can I have your comments on that, please?

Mr. Mike Tretheway: I'm certainly not a tax specialist on this. My concern is for economic development of communities. What I can say is that I think there's a bit of a red herring here vis-à-vis harm to domestic manufacturers. These are goods that are already being manufactured overseas. They're being distributed primarily to the United States from U.S. locations. To the extent that these goods are being sold into Canada, they're being distributed out of U.S. locations. There's no new harm being created for Canadian manufacturers.

For example, the foreign trade zone in Detroit handles $2 billion worth of goods. Almost all of that goes into Canada. Almost none of it goes into the United States.

We've been told by the people who wish to establish distribution centres here—their choice is going to a foreign trade zone in the United States—that the provisions of Bill C-13 may be what it takes to get them to come and look at a location in Canada.

But I can't give you a technical answer. I'm not a tech specialist.

Ms. Marlene Légaré: I would just add that while I pointed out that the immediate benefit of the program is the cashflow, as Mr. Tretheway pointed out as well, in the absence of this program there is also, I guess, the inconvenience of having to comply with the various other existing programs in terms of meeting the requirements they have for obtaining the deferral he mentioned, or for using bonding warehouses and so forth, with respect to the GST relief.

So I guess the other advantage would be simply in terms of administrative compliance, particularly with foreign companies. That can be enough of a barrier to present—

Mrs. Sue Barnes: Yes. I understand.

Thank you.

The Chair: Are you happy with the answer?

Mrs. Sue Barnes: Yes.

The Chair: Well, thanks for making her happy today. That's very important.

Mrs. Sue Barnes: Oh, I'm very happy today.

The Chair: Mr. Peschisolido.

Mr. Joe Peschisolido: Mr. Chair, I'd like to ask for the indulgence of the committee and ask a question specifically on the economic development of Richmond. The Vancouver airport is in my riding of Richmond.

First of all, thank you very much for coming out, Mr. Tretheway, and addressing the committee. Accepting that this bill deals with eliminating barriers, is there anything we can do proactively to speed up or make it easier for distribution zones to decide to come out and set up in Richmond, or even in the greater Vancouver area?

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Mr. Mike Tretheway: Yes, there is one thing. When the legislation is passed and proclaimed, and there's an accompanying set of reforms by the Canada Customs and Revenue Agency, in our opinion it is extremely important that the Government of Canada undertake a program, targeted at trade offices throughout the world, to disseminate the good news about Canada—that this is a new program, and this is how it works.

We think the previous programs that have been available have been poorly marketed by the Government of Canada and its embassies and trade offices. We strongly encourage a wide dissemination program about this, targeted at businesses overseas.

Mr. Joe Peschisolido: We'll work together to do that.

The Chair: Mr. Valeri, final question.

Mr. Tony Valeri: Thank you, Mr. Chairman.

I want to speak for a second on the comments made by Mr. Pillitteri. I think Mr. Marsland can speak to it as well. Through the consultation period the issue of domestic leakage was a concern that came from a number of people who came before the group that was hearing from them. I think the department has taken the necessary steps to ensure that domestic producers will be protected in that if people who are setting up export distribution centres do cross that threshold, in fact any advantage they may have had with respect to this program would be taken away.

But really, to go back to the old phrase we often hear in this country, we're a country that exports but not a country of exporters. I think a particular initiative like the one we see before us could act as a catalyst for these types of changes. It encourages SMEs in our country to go and seek out those companies that want to penetrate a NAFTA economy.

Because of our geographical advantage, because we are closer to Asia, because we are closer to Europe, and because we are right next door to a very large market, the United States, it makes all the sense in the world for those companies to locate in Canada. This program essentially removes some of the barriers that have existed so that we can attract those companies, thereby creating Canadian jobs and Canadian value added to products that are going to then flow to export markets.

So Mr. Pillitteri's point is well taken, and certainly we would welcome his scrutiny of the program as it proceeds.

Thank you.

The Chair: If there are no further questions, I want to, on behalf of the committee, thank you very much for appearing. As I said earlier, we do count on expert advice on all issues. You certainly have proven once again that you do raise interesting and valid points that will help us review the bill. Thank you very much.

The meeting is adjourned.