FINA Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Wednesday, October 1, 2003

½

1925

The Chair (Mrs. Sue Barnes (London West, Lib.))

Mr. Gordon Peeling (President and Chief Executive Officer, Mining Association of Canada)

½

1930

½

1935

La présidente

Mr. Frédéric Quintal (Spokesperson, L'essence à juste prix)

½

1940

The Chair

Mr. Clyde Graham (Vice-President, Strategy and Alliances, Canadian Fertilizer Institute)

½

1945

The Chair

Mr. David Chatters (Athabasca, Canadian Alliance)

½

1950

The Chair

Mr. Gordon Peeling

Mr. David Chatters

Mr. Gordon Peeling

Mr. Nick Nikolakakis (Vice-President and Chief Financial Officer, Mining Association of Canada)

½

1955

The Chair

Mr. David Chatters

The Chair

Mr. Pierre Paquette (Joliette, BQ)

¾

2000

Mr. Pierre Gratton (Vice-President, Public Affairs and Communication, Mining Association of Canada)

Mr. Pierre Paquette

Mr. Clyde Graham

Mr. Pierre Paquette

¾

2005

Mr. Frédéric Quintal

Mr. Pierre Paquette

Mr. Frédéric Quintal

The Chair

Mr. Pierre Paquette

The Chair

Mr. Pierre Paquette

The Chair

Mr. Pierre Paquette

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

¾

2010

Mr. Gordon Peeling

Mr. Roy Cullen

Mr. Gordon Peeling

Mr. Roy Cullen

Mr. Gordon Peeling

Mr. Pierre Gratton

Mr. Roy Cullen

¾

2015

Mr. Pierre Gratton

Mr. Roy Cullen

Mr. Pierre Gratton

Mr. Gordon Peeling

Mr. Mark Ruus (Manager, International Taxation, Mining Association of Canada)

Mr. Roy Cullen

Mr. Mark Ruus

Mr. Roy Cullen

Mr. Gordon Peeling

Mr. Mark Ruus

Mr. Roy Cullen

Mr. Pierre Gratton

Mr. Roy Cullen

Mr. Mark Ruus

¾

2020

The Chair

Mr. Larry Bagnell (Yukon, Lib.)

Mr. Gordon Peeling

Mr. Pierre Gratton

Mr. Larry Bagnell

¾

2025

The Chair

Mr. Tony Valeri (Stoney Creek, Lib.)

Mr. Mark Ruus

Mr. Tony Valeri

Mr. Mark Ruus

Mr. Tony Valeri

Mr. Gordon Peeling

Mr. Clyde Graham

¾

2030

Mr. Tony Valeri

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

Mr. Gordon Peeling

Mr. Shawn Murphy

Mr. Gordon Peeling

Mr. Shawn Murphy

Mr. Gordon Peeling

The Chair

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CANADA

Standing Committee on Finance

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NUMBER 075

l

2nd SESSION

l

37th PARLIAMENT

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EVIDENCE

Wednesday, October 1, 2003

[Recorded by Electronic Apparatus]

½  (1925)  

[English]

    The Chair (Mrs. Sue Barnes (London West, Lib.)): We have before us, by the order of reference of Tuesday, September 30, 2003, Bill C-48, an act to amend the Income Tax Act (natural resources).

    For tonight's panel we have as witnesses, from the Mining Association of Canada, Gordon Peeling, president and chief executive officer; Pierre Gratton, vice-president, public affairs and communication; Nick Nikolakakis, vice-president and chief financial officer; and Mark Ruus, manager, international taxation. Welcome to all of you.

[Translation]

    We also have Mr. Frédéric Quintal, spokesperson for L'essence à juste prix (gas at a fair price).

[English]

    And from the Canadian Fertilizer Institute, we have Clyde Graham, vice-president, strategy and alliances.

    I will take presentations in the order you are on the agenda. From the Mining Association of Canada, to take seven to eight minutes for whatever presentation you've prepared is fine. Who would like to start?

    Mr. Peeling, go ahead, sir.

    Mr. Gordon Peeling (President and Chief Executive Officer, Mining Association of Canada): Thank you, Madam Chair.

[Translation]

    My name is Gordon Peeling. I am President and Chief Executive Officer of the Mining Association of Canada. Unfortunately, my presentation this evening will be given only in English.

[English]

    I want to thank you for the opportunity to meet with you today.

    I have to tell you that Bill C-48 has placed the Mining Association of Canada and its members in a difficult position. Some of our members benefit from the legislation's proposed tax changes and would like to see the bill passed; others, because they're neutral, are indifferent. But then I also have a number of members who find themselves worse off as a result of these proposed changes from a tax and competitive point of view, and they would actually prefer to see the bill not proceed.

    There is unanimous agreement within the membership, however, that it is unfair and irresponsible that three years of corporate tax reform launched to improve the overall competitiveness of the Canadian industry should leave any part of any sector worse off than it was.

    Today I will focus my remarks on the segment of our membership that does not benefit from Bill C-48 and urge you to consider a relatively modest amendment that would help to correct this situation.

    The effect of Bill C-48 on individual commodities, potash, uranium, diamonds, precious and base metals, and the effect on individual companies, both existing operations and proposed new projects, will vary widely, depending on the maturity of assets and the jurisdiction of operation.

    The government suggests that the proposed new tax structure will be simpler; streamline tax compliance and administration; send clear signals to investors; improve the competitiveness of the Canadian mining sector; support investment and innovation and productivity, economic growth, and jobs for Canadians. We are not convinced that all these objectives will be met as fulsomely as both we and the government would like.

    Simplification is to be applauded, as the cost of filing should decrease once final implementation is achieved. However, the transition period will be very complex, with different rates applying each year. We strongly support the reduction in the corporate tax rate and planned elimination of the capital tax. However, the proposed elimination of the resource allowance causes a range of difficulties for the industry, and there is the difficulty.

    If Bill C-48 is passed, the federal resource allowance will begin to be reduced this year and eliminated by 2007. One perverse effect of this change is that it will increase taxes paid by the industry in several provincial jurisdictions. Initially, finance department officials told our industry that it was up to us to persuade the provinces to return this windfall to industry through tax measures in their individual provincial jurisdictions. Since then, the finance department has begun to assist us in this effort. We are grateful for that, and we have encouraged the Minister of Finance indeed to take up this issue directly with his provincial colleagues and territorial colleagues. And we understand that is, indeed, the case.

    But even with the help of the finance department, there is no guarantee that the provinces will respond to this request. In fact, Dalton McGuinty, quite likely the next Premier of Ontario if the polls are to be believed--and the only one to believed is the one tomorrow--has said, in the largest Canadian mining jurisdiction, that there will be no further corporate tax reductions. That may indeed hold true. But if provinces do fail to act, the tax competitiveness of key parts of the mining industry will in actual fact worsen, and that worsening will take effect at a time of intense global competition for mining investment.

    Base metal and some gold operations concentrated in northern Quebec and Ontario, but also located in Manitoba and Atlantic Canada, will be the most affected. For some companies, their competitiveness will be reduced, even if the provinces do their part. That is a maturity issue, which we can come back to later.

    The impact of Bill C-48 is greatest on mature mines, those less likely to benefit as much from some of budget 2003's other positive measures, such as the phased elimination of the large corporation tax.

    Our analysis concludes that unless action is taken by the provinces, the net provincial income tax revenues on existing mature mines will increase by 3% in 2003, 7% in 2004, 10% in 2005, 19% in 2006, and 29% in 2007. Even if the provinces act, the combined federal-provincial net income tax change for these operations will result in higher taxes paid, ranging from 0% in 2003, 2% in 2004, 2% in 2005, 4% in 2006, and 6% in 2007. Mature mines have substantial invested capital, and they are effectively captive to the changes in the tax rules.

½  (1930)  

    I must add that these changes are being proposed at a time when the base metal industry is just beginning to emerge from the most protracted downturn in its history. Jobs have been lost in Ontario and Quebec, in particular, with the closing of Noranda's Gaspé smelter and their magnesium plant near Thetford Mines. They are coming at a time of intense international competition from countries like China and India, whose regulatory regimes leave a lot to be desired in the area of environmental management. And they are coming at a time when Canadian mineral exploration is just beginning to come back. It is not the time, in other words, to undermine the competitiveness of this sector. That's called hitting them when they're down.

    So what can be done? When the finance department announced its proposed changes earlier this year, it indicated that a period of consultation would follow and intimated that they were willing to consider modifications to their approach. Over the past several months, therefore, we have pursued a number of possible amendments to Bill C-48 with the Department of Finance, but without success. We urge this committee therefore to give serious consideration to an amendment that would help to reduce the negative impact of Bill C-48 on our members.

    The legislation currently proposes the introduction of an exploration tax credit of 10% phased in over three years. It was included precisely because the finance department knew the overall impact of the changes would negatively impact metal mines. It is a positive measure in terms of limiting the impact, but also as a policy tool to encourage mining exploration and investment in Canada's north and remote areas. It is, unfortunately, at 10%, insufficient.

    We request that the committee increase the exploration tax credit to 20%, also phased in over three years. This would reduce the negative impact of Bill C-48 on the precious metal and base metal operations, largely concentrated in Ontario and Quebec. More of our members, though not all, then would find themselves on the neutral to positive side of the ledger. It would stimulate exploration by the senior end of the mining business and maintain employment. And as you know, the government's flow-through share program for mining exploration currently in place is designed primarily to benefit the junior sector. So this would give a boost and encourage additional expenditures by the senior industry in Canada and help northern communities.

    This would help to reverse the 25-year trend of declining metal reserves, now approaching a crisis situation, particularly for base metals. Nickel, copper, and zinc reserves have declined by 44%, 61%, and 71% respectively since 1977. It would also provide additional economic stimulation for northern rural and aboriginal communities across Canada. Increasing the ETC by 10% to 20% would provide a helpful lift and make a good economic instrument even better at a time when the base metals business could certainly use it.

    We estimate that such a change would represent, once fully implemented, a cost to the treasury of an additional $40 million per year beyond the 10% level that's presently proposed.

    In conclusion, let me stress that what is often forgotten is that unlike the general economy, mining pays royalties in addition to federal and provincial corporate taxes. This makes our sector one of the highest taxed in the country. We hoped, as did other sectors of the economy, that tax reform would help reduce our overall tax burden. Some of our members' hopes were met, but others were not.

    We urge this committee to help rectify this situation by amending Bill C-48 as we have suggested.

    I thank you for the opportunity to address you today, and my colleagues and I would be pleased to answer any questions you may have. Thank you, Madam Chair.

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[Translation]

    La présidente: We will now hear from Mr. Quintal, spokesperson for L'essence à juste prix.

    Mr. Frédéric Quintal (Spokesperson, L'essence à juste prix): Thank you very much, Madam Chair, for giving me this opportunity to present our view points. By way of introduction, I would say that I am something of a petroleum watchdog in Quebec. I am the spokesperson for an organization that represents consumer interests. By October 6^th, I will have devoted three years to this cause. Rest assured that I am extremely well informed in this area. I have done around 230 media interviews, and this is the third time I have participated in the political and parliamentary process. With that, I will begin.

    When I heard last week's debates with MPs in favour of Bill C-48, the main argument put forward was that it was necessary to increase international competitiveness. That was the main argument that stakeholders in favour of this tax relief program put forward. I would like to jog their memory and remind them that Canada has significant assets that will attract investment in the natural resources sector, and the oil sector in particular, with its huge oil, oil sand and natural gas deposits.

    In response to the Canadian Alliance member for Medicine Hat, Mr. Monte Solberg, who, last week, compared the Canadian corporate tax rate with those of countries like Ireland and others, I would like to remind him that neither Ireland, nor Iceland, nor Denmark, nor Sweden, nor Switzerland, nor the Netherlands has natural resources equivalent to ours. So what would be the point of copying the tax system of those countries?

    I'm going to draw a parallel here. Our Prime Minister decided to stand up to Formula One Corporation and thus not to yield to pressure from those who wanted the tobacco advertising legislation amended to allow for a single event. Belgium did succumb to that pressure. Our federal government has demonstrated its will to protect the gains we have made and our values. Similarly, I would encourage the government to believe in Canada's other values, i.e., the quality of the Canadian labour force, which is one of the advantages of our market, the consumer market we represent, the availability of natural resources, the proximity of a large market like the United States, as well as the social stability of Canada, which results in fairly reliable supply. In other words, the Pentagon doesn't need to send the U.S. army into Alberta like it did in Iraq. I think we have good social stability here.

    Besides, the Canadian dollar exchange rate makes for lower operating costs for Canadian oil companies. Not to mention the complete and unregulated commercial freedom, which already allow for strong competition, as reflected in the record profit levels achieved by the oil companies.

    Let's talk about investment. On September 24, 2003, the Parliamentary Secretary to the Minister of Finance, Mr. Bryon Wilfert, stated three main reasons for special tax treatment in support of Bill C-48. The third reason had to do with direct competition to attract international capital. And yet most of the data confirm that in 2000 and 2001, the oil industry invested $56 billion in Canada under the old tax system. I'm just looking at the number of zeros; I will have to work quite a few years to get to that number. However, under the old tax system, there were already good tax incentives that generated $56 billion worth of investment in Canada.

    In other words, the previous tax system does not appear to have put a brake on this massive amount of investment. And yet, this investment incentive argument is being used. I believe that the current conditions favour investment. For example, there are the enormous sites at Terra Nova, Muskeg River, MacKay River, Jumping Pound, White Rose, Syncrude, Athabasca, Meadow Creek and many other projects.

    The member for Medicine Hat, Mr. Monte Solberg, said on September 25, 2003, that each time we delay corporate tax cuts, we postpone an increase in Canadians' quality of life. I would like someone to explain to me how our quality of life reacts when the oil industry virtually doubled the budget of every Canadian family for gasoline, heating oil and natural gas.

    The tax cuts for the oil industry will generate a shortfall of over $3 billion for the federal government when it comes fully on line in 2007. I'm sorry, but that is a very far cry from the $260 million referred to in the press release on the last budget.

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    With a total debt of over $500 billion, can our government afford to give the richest industry in Canada a tax gift? We aren't talking about an industry in trouble here. This is not the Canadian beef industry, nor softwood lumber, nor air transportation. We are talking about the richest industry. By way of example, I'd like to name three Canadian companies: Shell, Petro-Canada and Esso. The first six months of 2003 have already generated 2.42 times the profits for the entire 12 months of 1999. I think those are pretty good results.

    I'd like to give another example. Four years ago, when the then Minister of Industry, the Hon. John Manley, proposed an assistance package for national hockey league teams, he had to withdraw his offer 48 hours later because the public was extremely upset to see the government getting ready to come to the aid of hockey millionaires. And now, this government here wants to come to the aid of oil billionaires. Well I'm sorry, but I find that highly controversial. As with the Tobacco Act, if you pass Bill C-48, five years from now, the oil companies will want more. This is a far cry from the authoritarian stance of the Liberal government of the Hon. Pierre Elliott Trudeau.

    In conclusion, I would say that you will be offering this tax relief without negotiating any conditions. Petro-Canada announced on September 3, 2003, that it would be closing its Oakville refinery because of the requirement to comply with the new legislation on sulfur rates in January 2005. The Oakville case casts serious doubt over future investment intentions. If the government wishes to create tax incentives to attract further investment, it should negotiate the conditions when it makes the offers. Please, no hand outs.

    There is one thing that's important. Petro-Canada was the first refinery to announce the closure of one of its facilities because of the requirement to comply with this legislation. The 1999 Department of the Environment document confirms that four or five other refineries are going to close because of these environmental regulations. We are talking about investment, and while on the one hand, tax breaks are being handed out, on the other, there may be other refineries that are going to close. When that happens, you won't get anywhere near the investment you think you're encouraging.

    I invite all Liberal MPs who are going to vote in favour of Bill C-48 to go back to their ridings and explain themselves to their constituents.

    Thank you, Madam Chair.

[English]

    The Chair: Merci, monsieur.

    Now we'll go to Mr. Graham, from the Canadian Fertilizer Institute.

    Mr. Clyde Graham (Vice-President, Strategy and Alliances, Canadian Fertilizer Institute): Good evening.

    Canada is the world's largest potash producer, with approximately 35% of the world market. About 95% of Canada's potash is exported to over sixty countries worldwide. Potash ore is the raw material for potassium fertilizers.

    There are three major potash producers in Canada: IMC Canada, Agrium, and the Potash Corporation of Saskatchewan. Together, these three companies employ about 4,800 Canadians, mostly in rural areas. The mines are located in Saskatchewan and New Brunswick. Our members are not members of MAC, I would note.

    Our industry has worked diligently for three years to support the legislative changes contained in Bill C-48. While we continue to believe that the five-year phase-in period is too long, we support all the provisions of Bill C-48. In particular, reducing the income tax rate for resource companies and allowing full royalty deductibility are critical to the future competitiveness of the potash industry.

    At this point in the legislative process any undue delay in implementation of this tax measure would create financial uncertainty for our member companies. As you know, the federal government has engaged in extensive consultations on this matter, both before the budget and after. We believe the time has come to move forward.

    Currently, in the world before Bill C-48, the potash industry is excluded from measures aimed at increasing equity in Canada's corporate tax structure. The potash industry has been historically disadvantaged by the inadequacy of the resource allowance and other tax measures.

    In the 2000 federal budget the government announced a reduction in the general corporate income tax rate from 28% to 21% over a five-year period. It is now at 23%. Some sectors such as mining, including the potash industry, were excluded from this rate reduction on the premise they already benefited from tax provisions that reduced their tax rate to 21%, primarily because of the resource allowance, but for potash the resource allowance simply doesn't work. Canada is the only federal state in the world that does not provide for full deductibility of royalties of a provincial or state nature, leaving the potash industry subject to double taxation.

    Moreover, as other countries reduce their tax rates, the Canadian potash industry's international tax competitiveness will further deteriorate. Canada's potash industry is in a unique and unfair tax situation without Bill C-48.

    The high tax burden is making it more difficult for Canada to maintain its position as the world's pre-eminent supplier of potash. Canada's mines are among the most modern and efficient in the world and employ leading-edge technology. We are the global low-cost producer before tax but a high-cost producer after tax. I would point out that we do compete against other major world suppliers that have extremely low tax regimes for international markets. In fact, our current effective marginal tax rate, including royalties, is 70%.

    In summary, Bill C-48 will eventually, over five years, restore tax fairness for potash. Our industry has, I believe, waited long enough.

    Thanks very much.

½  (1945)  

    The Chair: Thank you to all the witnesses, and thank you for your briefs. They have been circulated to all the members.

    I'll go to Mr. Chatters first. You have up to seven minutes, sir.

    Mr. David Chatters (Athabasca, Canadian Alliance): Thank you, Madam Chair.

    Well, it's really hard to understand the rationale for Mr. Quintal's position on this issue and his references to my colleague's speech in the House of Commons. I think the evidence is pretty clear what presenting a competitive tax regime to an industry can do, not only for that industry but for the country when it comes to their standard of living and the wealth creation investment brings. Certainly, I don't have to go to Ireland or anywhere else to see that; I see it right in my own riding at home.

    If you think for one moment that the oil and gas industry could invest $52 billion a year if the industry wasn't profitable and competitive, well, that's simply not true. You have to have a competitive industry to attract that kind of investment, and when you get that kind of investment, you get the kind of job creation you do in Fort McMurray in the tar sands. I just don't understand how anybody could argue against it.

    But that's not the thrust of my comments, really. I wanted to address some of the concerns of the mining industry.

    It seemed to me from listening to the debate in the House and the discussions with the departmental officials last night that the problem here seems to come about because of the variation in royalties some provinces charge as compared to what other provinces charge. That appears to be somehow related to the distortion in the equalization program and to how charging higher royalties affects what happens to your equalization. I think there's a distortion in the system here because of equalization. You seem to be able to see it between, for example, Quebec and Ontario, one receiving equalization and one not, one having higher royalties and one lower royalties, and therefore one faring better in this adjustment than the other.

    Would you judge that to be a reasonable assessment of what's causing at least some of the problems in this industry?

½  (1950)  

    The Chair: Mr. Peeling.

    Mr. Gordon Peeling: Thank you, Madam Chair.

    That's certainly one element, but as well, the increase in most provincial or territorial income taxes as a result of the changes is where the income taxes are based on federally defined taxable income. Removing the resource allowance redefines taxable income and exposes a larger stream to taxation. That's one of the additional factors in this, and that's why one of those messages I referred to from the Department of Finance, that there's a windfall gain for the provinces here.... We now have to work with the provinces to put that money back in industry's hands, because that was not within their plans for taxation change. We will have to work to help create a neutral situation.

    But there's also a change that results from the way the resource allowance is calculated, where certain deductibilities come before or after resource allowance calculation. It has to do with the maturity of the asset base and the degree to which the exploration expense and cost allowance pools have been used. I believe I'm correct in these details. The removal of the resource allowance creates a number of additional calculations.

    For new projects it works out for the most part quite positively. For a lot of sunk capital that is not the case. This is particularly in the area of base metals, and for some of the precious metals producers that is the case. There are a number of consequences here that don't work out very positively for us.

    Mr. David Chatters: You're suggesting an amendment to raise the 10% credit to 20%. That would simply help new exploration and new mine development, would it not, or am I mistaken there?

    The other one you didn't address is the elimination of the capital tax. That has to be a huge benefit to the industry as well, does it not?

    Mr. Gordon Peeling: Let me talk to the large corporation tax first, but yes, it is, and that's factored into all of our analyses. So that benefit is.... Certainly we've encouraged the government to move on large corporation tax for quite a number of years, and we're very pleased to see that happen, but even taking that factor into account still leaves some of us on the negative side of the ledger.

    Now, to go to those mature situations, first of all the exploration tax credit, it would lift everybody, but you would only get a benefit from it--and I think this is the positive public good and public policy aspect--if you spent money in Canada. In this case, it would encourage the senior companies to increase their expenditures on exploration and additional deposit development. It would help maintain employment in the more mature areas and give a benefit to finding new deposits as well.

    The bulk of those benefits would be captured in northern communities across northern Ontario, Quebec, Manitoba, and the territories, and really would be directed toward aboriginal communities and to support businesses that support the mining industry and the exploration business, and that sell services. So it helps lift all of that level of activity.

    As I indicated, we've seen a major and serious decline in our base metal reserves over the last twenty years, and this would help reverse that situation. That would certainly help maintain employment in rural areas of Canada.

    Maybe a specific company view on this would be helpful.

    Mr. Nick Nikolakakis (Vice-President and Chief Financial Officer, Mining Association of Canada): Perhaps I can give you some details on our exploration expenditures at Placer Dome. We have three mature mining operations in northern Ontario, one of which we've been operating for close to a century. Our exploration budget for this year was somewhere in the neighbourhood of $27 million, and we're contemplating increasing that budget by almost 100% at our mature operations.

    I think the key thing to point out here--I just want to give everyone a sense of the process we undertake--is that as a representative of the Canadian region, we go in front of our board and we compete with representatives from other global regions in terms of those exploration dollars. Historically, Canada typically only competed with countries like the U.S. and Australia, but more recently there's been an emergence of exploration dollars in other countries, most recently in South Africa, countries like Tanzania, and nations in southeast Asia as well.

    So when we're in front of our board, clearly one of the things we need to address is the taxation issue, and we need to demonstrate that our after-tax cashflows are positive, particularly on marginal deposits. In a sense, then, we are lobbying our own boards for exploration dollars.

    Perhaps I can just give everyone a sense of what the benefits are to a company like Placer Dome. When we do spend those exploration dollars on those mature assets, it results in production in the early years--in other words, in years one to three--which of course results in higher taxable income. But we also have revenue-sharing agreements at one of our operations with the first nations groups, and those first nations benefit directly and indirectly from our exploration dollars. Of course, we assist them with some of their other business ventures in and around northern Ontario.

    I think the key thing to point out here is that the exploration dollars we are spending will benefit northern Ontario tremendously. We are also looking to increase our activities in northern Quebec. I think that's the key point in terms of the benefits on the tax side, that really it benefits the northern communities of Ontario and Quebec. We also have a presence in Newfoundland, and of course there's quite a bit of exploration activity in northern B.C. and Manitoba as well.

½  (1955)  

    The Chair: Do you have one small thing to add?

    Mr. David Chatters: Yes, a short statement.

    I just want to say that perhaps you should talk to Mr. Quintal and explain to him what happens when the tax regime gets uncompetitive with the rest of the world. No industry in the world knows better than yours what happens when that's the situation.

    And that's all, Madam Chairman.

    The Chair: Okay.

    Monsieur Paquette, s'il vous plaît.

[Translation]

    Mr. Pierre Paquette (Joliette, BQ): Thank you, Madam Chair, and thanks to all of you for your presentations. I am obviously happy to see representatives here from the Mining Association of Canada.

    When this problem was raised last spring, I asked a question in the House. Mr. Manley replied that Bill C-48 was not the least bit problematic because it was a matter of fairness. Let's look at the first part of Bill C-48, which lowers the tax rate from 28 to 21 per cent. This indeed is a matter of fairness with other industries that have already benefited from this decrease in the October 2000 budget. However, that is not what this is about. We support the decrease from 28 to 21 per cent over five years, but moving from the resource allowance to a deduction for royalties is problematic. This is something very specific to the natural resource industry that does not affect the other industries.

    We are talking about fairness. It seems to us that the formula in Bill C-48 is not fair to a number of industries whose royalties may not be in keeping with what the oil industry has to pay, for reasons that are very easily explained. Last spring, the Mining Association of Canada asked that the current system be maintained, i.e., that the resource allowance be kept in place and that royalties be left out of the equation. Today, you have a new position. It's my understanding—I think the representative of the potash industry gave us an illustration of this—that even within the mining industry, Bill C-48 is beneficial to some groups, but not to others.

    If I understand correctly, if the bill were amended—we will begin clause-by-clause study tomorrow—such that after a three-year period, the tax credit would be 20 per cent, even if there were some losers, that would be an acceptable solution to the industry as a whole. I am asking the Mining Association of Canada and Mr. Graham if that would be an acceptable compromise.

¾  (2000)  

    Mr. Pierre Gratton (Vice-President, Public Affairs and Communication, Mining Association of Canada): Would it be acceptable? It would be more acceptable. For some of our members, it still wouldn't be enough, but increasing the rate to 20% would mean that there would be more winners among us. As was just mentioned, it would have a very positive effect for Placer Dome, which is currently one of the losers under Bill C-48. I should also point out that we proposed other adjustments a few months ago to the Minister of National Resources, but you also have to be realistic. So we are now working mainly on this amendment, which will satisfy several, but not all, of our members.

    Mr. Pierre Paquette: Could Mr. Graham let me know what he thinks about that?

[English]

    Mr. Clyde Graham: I guess I won't comment directly on the MAC proposal, but I can tell you how we view the legislation and what we've been requesting for three years.

    We view this as correcting a historical problem for our industry. We have an anomaly in the way our industry is, compared to other resource sectors. When the budget came down on February 18 and we talked to our potash members about the details, their first sense was that while the government was moving in the right direction, of course it was not going fast enough.

    I think we were told by the finance department that there were two major reasons—correct me if I'm wrong—why we couldn't get our situation corrected immediately, and the five-year phase-in. First, obviously there are companies that will not be as well off as they were previously as a result of this change, and there's a tax expenditure involved, a cost to these changes. So we are being asked by the government to be patient for these changes, even though I think the government and your committee, in a report last year, recognized that the potash industry has been historically disadvantaged by the tax regime. So we're being asked to be patient in correcting this wrong.

    I guess I would ask you to weigh that in all your deliberations. Our priority is to get this legislation through as quickly as possible. We'd like to see it done in this session of Parliament, given the political circumstances.

[Translation]

    Mr. Pierre Paquette: Madam Chair, I would like to announce to committee members that tomorrow, I am going to move an amendment to increase the tax credit for preproduction mining expenditures to 20% over three years. That appears to be an acceptable compromise for the mining industry, without in any way penalizing or applying to the oil industry, which this provision should not apply to.

    I will of course move this amendment if the law clerk can get it to me by tomorrow morning; I guess the administrative machinery can deliver the goods.

    Mr. Quintal, I listened closely to your presentation. Another thing that really bothers us with Bill C-48 is that it gives the oil industry a boost at a time when the oil industry is already in an extremely good position. Yesterday we were told that when this reform goes through, it will be at an annual cost of $250 million, and 80% of this shortfall for the federal government will go to the oil industry. So Bill C-48 is definitely very beneficial to the oil industry.

    You estimate that the cost will be $3 billion when the reform is fully implemented. I raised this question yesterday. I was saying that you could already see in the financial statements of the multinational oil companies that they were expecting profits of around $250 million. So you have to wonder who, apart from them, is going to benefit from this reform. We were told $250 million for the entire period. I asked to see the studies, but no one could tell me where I might find them. However, I was told that we could see their methodology. It would be interesting to see their methodology before voting on the bill. I hope that this request by the committee will be acted on.

    How did you arrive at your estimate of $3 billion? What method did you use to come up with that amount?

¾  (2005)  

    Mr. Frédéric Quintal: Unfortunately, in this regard, I have to say that I am just a consumer activist without the financial means to invest in a study. I did approach some tax experts, and I would have had to invest $5,000 of my own money to get a convincing and indisputable study. In August, I spent about 12 hours looking on the Internet at future development forecasts for every oil company, and there are about eight of them: Talisman, Anadarko, Shell, Petro-Canada, Husky and a few others. It took me about 12 hours to come up with that figure.

    Naturally, it's easy for my opponents to tear my argument to shreds. So I won't take it any further. I just hope that in January 2008, when we have the results for fiscal year 2007, they will prove me wrong. But according to my projections for this phased-in program, it will come close to $3 billion. I don't think that the Government of Canada, which still has a huge debt to pay down, can afford to forego this revenue for the benefit of the richest industry in Canada, which has already greatly benefited from government generosity toward business. The oil industry has played around with refining margins in the past five years, and there have been fluctuations of over 250%. Oil companies have increased the refining margin from 5c to 18c per litre, especially on August 21, 2003, because they base their wholesale prices on the US market, which can no longer keep up with the demand. But unfortunately, when NAFTA was signed in 1990 or 1991, in the early 1990's, it was agreed that Canadian wholesale prices would be based on US prices.

    Mr. Pierre Paquette: In your opinion, tax relief for oil companies would never be reflected at the pump, right? That would never be passed on to the consumer.

    Mr. Frédéric Quintal: No, you'll just see even higher profits for oil companies. Remember that in 2003, in six months, without this program, three companies, Esso, Shell and Petro-Canada, have already surpassed by 242% their net profits for all 12 months of 1999, which was considered a very good year.

    I would like to ask Mr. Chatters a question.

[English]

    The Chair: Actually, we don't question other people.

[Translation]

    Mr. Pierre Paquette: He was tested in November 2000, but there will be another test.

[English]

    The Chair: You could maybe see him outside.

    Monsieur Paquette, just for my own personal clarification, do you have just one amendment for tomorrow, or are you still working on others?

[Translation]

    Mr. Pierre Paquette: I have three. However, given what we've been told, I would stick to the amendment requested by the industry if I had the assurance that the entire committee would support it.

[English]

    The Chair: Okay. I'm sure you will give it to the clerk, when you are ready, in the morning. I know you will do your best effort.

[Translation]

    Mr. Pierre Paquette: It's out of my hands. I discussed what I thought should be amended, and the law clerk... We haven't had much time. The bill was referred to committee only yesterday.

[English]

    The Chair: Yes. We are all aware that this was on the table for a while. Be that as it may, I know that the legislative clerk is at your disposal. Thank you.

    All right. Now we'll go to Mr. Cullen.

    Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chair.

    Thank you to all the witnesses.

    Mr. Graham, I'm quite confident that if the government wanted to move the exploration tax credit to 20%, it could be done in a heartbeat, if the political will was there. I'm sure that it wouldn't negatively affect your sector at all.

    Mr. Nikolakakis and Mr. Ruus, you're down here as the Mining Association of Canada. Are you both with Placer Dome?

    A Voice: That's correct.

    Mr. Roy Cullen: You're both employed by Placer Dome.

    Mr. Peeling, one of the things I'm finding very confusing and puzzling is that there still seems to be a gap in the information on who's going to be positively affected by these measures and who's not. I know that there was a massive amount of consultation, sharing of data and models, you name it.

    In fact I and others were aware some time ago that base metals, in particular, were not going to be doing very well with this proposal. That was even after the government put in the 10% exploration credit. That was done. Of course, if you go back, my understanding was that the idea was to be revenue neutral, roughly, or slightly positive. For many parts of the mining industry, that will be the case, as we heard from potash, and for some others.

    I'd like to use this opportunity to make things clearer, at least in my mind. You say here that base metal and some gold operations concentrated in northern Quebec and Ontario, but also located in Manitoba and Atlantic Canada, will be the most negatively affected. “Negatively” is a presumption. You say that for most companies, their competitiveness will be reduced even if the provinces do their part.

    I know that you can't disclose proprietary information, but we're talking about quite a number of companies employing quite a number of people in various locations. We're not talking about one or two companies employing 50 people. Could you perhaps put some parameters around it, generally?

¾  (2010)  

    Mr. Gordon Peeling: Particularly in the base metal sector, from the analysis that we've done—and we've used the same consultants the Department of Finance has used—it appears that the largest companies, the biggest investors, are the ones that are on the wrong side of the ledger.

    Mr. Roy Cullen: Okay. These are some big household names.

    Mr. Gordon Peeling: These are not insubstantial operations. They are household names.

    For gold, again as I say, it depends on the maturity of the asset. You've heard from Placer Dome that they have one operation that has been working for a hundred years. They fall on the negative side of the ledger on this.

    Newer operations tend to work out on the positive side, but not in all cases. It does very much depend on whether provincial jurisdictions have tied their definition of taxable income to the federal definition of taxable income. It depends on how much below the 25% resource allowance they may have used.

    Let me make a comment. Provinces have realized the global competition that they face for investment. Many of them move to make their regimes nearer. One area where they can move, which is specific to the industry, is royalties. Having done that, this change in the removal of the resource allowance actually pulls the rug out from underneath them.

    Mr. Roy Cullen: Okay. When you say that these will be most negatively affected, you're also factoring in the reduction in the large capital tax. You're also saying that “for some companies, their competitiveness will be reduced, even if the provinces do their part”. In other words, the provinces take the windfall and translate that into a reduction in royalties or taxes for the sector.

    Are we talking here about simply timing differences? I know there's a time value of money that's important as well. Are we talking about companies that won't be able to benefit from these measures as early as others, or as they otherwise would be, or are we talking about something that is more than a timing difference but a real difference?

    Mr. Gordon Peeling: It is a real difference. We have included the calculation of large corporation tax. The population of people who are on the negative side of the ledger are clustered, as I said, in the base metals and some of the gold industry.

    It can be a number of factors. The “juicing” of the exploration tax credit does move some into the positive side, all of the other factors being considered. Some don't quite get close enough to that. It may be because the large corporation tax isn't quite as beneficial to them, or it may be the way provincial royalties are calculated. There are a variety of answers to that.

    Mr. Pierre Gratton: Might I add for clarity, the large corporation tax has the greatest impact when you're starting a new project. That's when the bulk of your capital expenditures take place. When you have a mature asset, you continue to spend capital, but it's not on the same scale as a new start-up operation. That's why the benefits to mature mines are not as significant, even though our industry is among the largest payers of the large corporation tax, which is why we've been urging its removal for some time.

    Mr. Roy Cullen: When we talk about this tax and the negative effect for these companies, we're talking about federal taxes only. Am I right? We're talking about the result of the federal tax measures. You've said that even if the provinces do their part, in other words, they fill the tax room. We're not confusing the tax burden in the sense of federal-provincial. We're talking about federal taxes and their impacts, and that includes the capital tax.

¾  (2015)  

    Mr. Pierre Gratton: It's a mix. There are some, if the provinces do move, where the difference will put them over the edge. They're still concerned because there's no guarantee that the provinces are going to move. We're getting into smaller numbers. There are others for whom, even if the provinces move, they're still on the wrong side of the ledger.

    Mr. Roy Cullen: Yes. The problem, as you've described it, especially with some provinces, is that it's not known with any degree of confidence if they will take the windfall and translate it into tax benefits for your industry. If the government were to go along with your proposal, it would at least counter some of that.

    I know that you've looked at the capital tax and accelerating the elimination, but that would be a broader issue across all of government. You've looked at the resource allowance in the sense of delaying the elimination. Again, that would affect other parts of the natural resource sector negatively, so you haven't put that forward.

    You are saying that we can move from 10% to 20%. It's a modest request. It brings some of your members—and some of these members employ a lot of people across Canada—to more of a level playing field to give them some advantages with the tax changes. Otherwise, they'll be negatively impacted on.

    Mr. Pierre Gratton: That's right. I guess Placer Dome is the example we brought that falls into that category.

    Mr. Gordon Peeling: It does get the population close to all being in a happy camp.

    Mr. Mark Ruus (Manager, International Taxation, Mining Association of Canada): That's right. From Placer Dome's perspective, the proposed bill, as it currently stands, would have a negative impact on us. Expanding the ITC would help to make it more acceptable to us.

    Mr. Roy Cullen: This would create jobs in Canada.

    Mr. Mark Ruus: Right.

    Mr. Roy Cullen: I have a final question. I'm not aware of this myself, but I'm told that many of the larger public mining companies have, in their quarterly reports, commented that the measures by the federal government currently on the table would be positively received. There are some who are saying that this would be a good thing, so why would we need to do anything further?

    Mr. Gordon Peeling: Maybe we'll let Placer Dome answer, because they are a very good example of how this has to be booked for them.

    Mr. Mark Ruus: I'm sorry, could you repeat the question?

    Mr. Roy Cullen: At Placer Dome, you probably have a quarterly report. In the quarterly reports, I'm told that—not necessarily in the context of Placer Dome, but perhaps in the context of Placer Dome—there are some large mining companies that have commented on the measures on the table right now. They're saying that these will be positively received by the industry.

    I'm hearing from some on the government side, why would we do anything more—everyone is happy with it.

    Mr. Pierre Gratton: One example is Falconbridge. What's at issue there is the nature of the phase-in. In the first year they actually come out slightly up, and then it gets worse from there.

    Mr. Roy Cullen: Just so I'm making myself clear, in quarterly reports there's often commentary by the chairman or the president. In some of these reports, some of the CEOs and chief financial officers are saying these measures would be positively received. You're saying some of it is the phase-in.

    Mr. Mark Ruus: Placer Dome did not make any comment, to my knowledge, in our quarterly report with regard to the proposed changes, other than the fact that we report our financial statements under U.S. GAAP, and U.S. accounting standards do not allow you to reflect any impact of the proposed tax changes until they are passed as law.

    However, we do put supplementary disclosure, which requires us, when something is at the stage Bill C-48 is at, to book an accounting adjustment for that, which is negative, though the amount, I believe, was not separately disclosed in our quarterly report. In the event that Bill C-48 passed as currently proposed, we would have a negative impact, which we'd have to report, and we would likely disclose that separately as part of our financial statements. But we have not, to my knowledge, commented that this would improve the environment to operate in.

¾  (2020)  

    The Chair: Thank you.

    I'll go to Mr. Bagnell.

    Mr. Larry Bagnell (Yukon, Lib.): I'd just like to use my time to have a brief conversation with Mr. Peeling. I know it's hard, because you have different people affected in different ways. What I want to do is outline my position and see if there are any comments you can make.

    As you know, I'm a big supporter. We've dealt with a number of things that have been a big support for the mining industry, and I've supported your organization in all these things. My bias is.... And I'm very delighted this bill's coming forward to help the mining industry. Of course, it's distressed in my region. There are probably hundreds of thousands of claims, but not a single hard-rock mine operating. So we have to do something.

    Of course, we couldn't put the mining tax down before. We had to come up with this negotiated package with the resource credit, because mining already had that advantage, which wasn't very rational.

    This is a balanced package. And there is a cost to the government calculated; the government's paying out on this. Once again, to me that's good, because it means we're supporting the mining industry in the net total. Although, as some companies know, it will affect them negatively.

    You know the Chinese proverb that we live in interesting times. This is an interesting legislative framework this bill's going into. We have a whole bunch of bills left and not very much time in this particular legislative period. Because I'm excited about this bill and I want to get mining through, I don't want to jeopardize the bill, for instance, on amendments, if they're going to jeopardize the bill because of the timing. Unless someone had an amendment that was supported by the government and the opposition and wouldn't slow down the process, personally I'd be very worried about it, because of our legislative framework. Our time may be in hours on this particular bill, when you look at all the other bills and the time that's left.

    My question is, are some of the improvements--and in normal times I'd be happy to discuss all of them--worth losing the bill over? I suppose that's part of my question, and you can comment on anything else.

    Mr. Gordon Peeling: Clearly, we don't want to lose the bill. That's why we're making one modest suggestion to improve it. Obviously, if we had a long legislative time period before us and an opportunity for additional consultation.... We have made numerous other proposals to the Department of Finance over the past five months, but the reality is that none of those were accepted. But this is the one thing that would help push that cluster of those negatively affected closer to the positive side and move some over into the positive side of the ledger. That's why we're focusing on one.

    We don't want to take a lot of time with this. We hope that within the tight schedule you're facing as parliamentarians, with the benefits that would flow.... And remember that to obtain this benefit of the expiration tax credit, which as we noted is a cost of about $40 million, we have to spend about $400 million. It would provide, I think, real benefits to northern communities.

    At the end of the day, we still have to have the money to spend, but it would certainly help encourage the industry to do that and would maintain employment. I guess we think that's worthy, even within your very tight time schedule, of your consideration.

    Mr. Pierre Gratton: I might add that we have several members that used to explore quite actively in your territory. There is renewed interest in the Yukon today, and we're starting to see exploration pick up, particularly by the juniors. I believe this credit, applied primarily to the benefit of the seniors, would also help exploration activity in the Yukon, which, as you stated, badly needs it.

    Mr. Larry Bagnell: Yes. I'll just close so I leave time for someone else.

    Basically, my position is that I'll do anything to support mining, to help you support mining, but in this environment, I'm going to make sure we don't lose the bill.

¾  (2025)  

    The Chair: Mr. Valeri, please.

    Mr. Tony Valeri (Stoney Creek, Lib.): I just have a couple of questions and a point of clarification for the Mining Association. I thought I heard you say you would expect members to be paying materially more federal tax as a result of these proposals. Is that correct? Is that taxes paid currently, or are we talking about a date in the future that you would expect to be taxable?

    Can someone answer that?

    Mr. Mark Ruus: I'll answer from the perspective of Placer Dome.

    Our calculations have shown that because you're effectively increasing the tax base, and given that we just came out of a very low-cost gold environment, and it's turned around, it will not only accelerate the tax horizon so we'll be paying taxes earlier, but the absolute amount of tax over the existing life of our mines, looking forward ten years, is going to increase by a material amount, even after taking into account a reduction of the large-corporation tax, the elimination of that.

    So in the initial couple of years there would not be a national cash tax impact, but over the last eight years, approximately, we would end up paying significantly more cash taxes over the remaining life of our mines.

    Mr. Tony Valeri: You would expect in the third year you'd start to actually pay cash taxes.

    Mr. Mark Ruus: Right, and it's all subject to the gold prices varying--depending on what the price of gold does, it obviously impacts the profitability of the operation. So we're market-takers as far as the price of gold is concerned, and there's the exchange rate: our costs are in Canadian dollars in Canada, and as the Canadian dollar gets stronger, it impacts the profitability as well.

    Mr. Tony Valeri: Okay.

    The other question I have is there have been statements made that the 20% would get most of the members on the right side of the ledger, but not everybody. What would it take to get everybody on the right side of the ledger?

    Mr. Gordon Peeling: I guess we would have to go back to one of those other alternatives, which was to simply give people the option of either keeping the resource allowance or going to full deductibility and extending the 21%. That's not on.

    We will continue, since that is not going to be an outcome of this discussion today or Bill C-48. We have been a supporter right from the beginning of the broader coalition under the chamber of commerce, which said that the only way Canada is going to be the investment site of choice within the NAFTA region is to move to a 17% federal corporate tax rate, and that would do it there.

    Mr. Clyde Graham: The potash industry is a mining industry. We extract our material from the ground as well.

    You talked about the right side of the ledger. We've been on the wrong side of the ledger for a long time. In the March budget the government told us yes, we have been on the wrong side of the ledger, but they're going to ask us to wait five more years to get back out of the hole that's been dug.

    We would be extremely concerned if anything were done that would jeopardize this bill at this period of the legislative agenda and the cycle of the government.

    There are things that could be done to advantage our industry or to lessen our disadvantage. We could elect immediately to get rid of the resource allowance. We could elect immediately to go to full royalty deductibility for our industry alone. You could do that. We proposed that. But at the same time, we are concerned that if we end up reopening the legislation, the whole thing could be lost.

    I want to really keep that firmly in mind--what's at stake here. We spent three years getting to this point of having the bill at second reading, and I just want everybody to be very sober about what they're doing.

¾  (2030)  

    Mr. Tony Valeri: Okay, thank you.

    The Chair: Mr. Murphy has a question.

    Mr. Shawn Murphy (Hillsborough, Lib.): Thank you, Madam Chair. I have a couple of points of clarification.

    It's my understanding that when this Bill C-48 was being announced and marshalled to the House the overall intent was to level the playing field between the resource-based sector and other sectors of the Canadian economy. And when corporate tax reductions were announced several years ago, the resource-based sector didn't take advantage because they argued that you had the advantage of the resource allowance.

    Now there's an argument here that some people are not, as you would classify, on the right side of the ledger. The potash industry has indicated that they've been on the wrong side of the ledger for years. Now they're getting on the right side of the ledger. Could it be a situation that you were on the right side of the ledger right from the get-go, and now with these changes the field has been levelled? Do you understand my point?

    Mr. Gordon Peeling: I certainly do, but we've not been on the right side of the ledger historically, either. We've been one of the most highly taxed sectors of the economy.

    I'll go back to the point that we face three levels of taxation, not two like the rest of the economy. The unfortunate part of this is that we should be trying to make a stronger Canadian economy that's attracted to investment. It takes all levels of government to work with the industry to do that.

    Unfortunately, you can see that the lack of past working together between the Saskatchewan government and the federal government has left that industry with very high royalties. Quite frankly, the resource allowance was put in place back in the late 1970s because of a rent fight between federal and provincial governments. It may not have been the best answer, but we were affected by it as well, and we do operate in some jurisdictions that are above the 25% limit. This is all part of the mixed answer of all of this.

    I'd like to give you clear, crisp answers that are nice and easy, that line up on one side of the ledger or the other. I have a mixed community in all of this. This bill splits people right down the middle. It would be nice to have everybody on the winner category, but that is just not the case. The Saskatchewan government hasn't moved off its regime for 25 years. The federal government solves that problem, but we don't want to wait 25 years for another solution to this.

    Mr. Shawn Murphy: If the provinces were to reduce their levels of taxation in all forms to be revenue neutral pre-changes, would that satisfy your concerns? I'm not suggesting you can get that going, but if you could, in the perfect world, would that satisfy you?

    Mr. Gordon Peeling: We've done those calculations. In some instances, it would be easier if the focus were to be strictly on the mining royalty taxation end, as opposed to the provincial corporate taxation. The problem with changes in provincial corporate taxation levels is that obviously they affect all sectors of the provincial economy.

    So the one the provincial governments can work with that simply affects the mining industry, which would offset this, we think it would take, based on our analysis, a 1.75% reduction, on average, across those seven jurisdictions to bring at least the federal-provincial taxation changes back into a neutral position.

    Mr. Shawn Murphy: You've obviously done some very extensive modelling in your analysis. Under the present regime, the way the act is worded right now, what is the net benefit to the total mining industry? And I assume you're factoring in the large-corporation tax.

    Mr. Gordon Peeling: If I'm to believe the government's own numbers, where they said the cost to the fisc of the entire basket of changes was something in the order of $250 million, our net benefit is about $10 million.

    The Chair: Thank you very much. I have no further questions. I appreciate, as do the other members, that you waited through our delay of voting and doing our work in the House.

    I also want to say that as chair and as the clerk has advised me, we're only aware tonight of the one amendment. And we thank Mr. Paquette for giving us the substantive idea of what that amendment could be for tomorrow.

    Colleagues, I will see you in the morning for our regular pre-budget meetings and then we will be moving to clause-by-clause at 12:30, unless we finish some of those pre-budget meetings just slightly before. Right now we're scheduled for 12:30.

    I thank you very much for your patience tonight.

    This meeting is adjourned.