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37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Tuesday, September 30, 2003

1535

The Clerk of the Committee

Mr. Shawn Murphy (Hillsborough, Lib.)

The Clerk

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)

The Clerk

Mr. Gary Pillitteri (Niagara Falls, Lib.)

The Clerk

Mr. Rick Casson (Lethbridge, Canadian Alliance)

The Clerk

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

The Chair

Mr. Anthony Pollard (President, Hotel Association of Canada)

The Chair

1540

Mr. Marc-André Charlebois (President, Association of Canadian Travel Agencies)

1545

The Chair

1555

The Chair

Mr. Jeffrey Dale (President and CEO, Ottawa Centre for Research and Innovation)

1600

The Chair

Mr. Mario Tombari (Vice-President, Canadian Affairs, Tax Executives Institute, Inc.)

1605

1610

The Chair

Mrs. Michelle Mulder (President, Canadian School Boards Association)

1615

The Chair

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance)

1620

Mr. Jeffrey Dale

Mr. James Rajotte

Mr. Jeffrey Dale

Mr. James Rajotte

Mr. Jeffrey Dale

Mr. James Rajotte

Mr. Jeffrey Dale

Mr. James Rajotte

1625

Mr. Martin Taller (Vice-President, Policy, General Manager, Eastern Canada, Association of Canadian Travel Agencies)

The Chair

Mr. James Rajotte

Mr. Anthony Pollard

Mr. James Rajotte

The Chair

Mr. Anthony Pollard

The Chair

Mr. Pierre Paquette (Joliette, BQ)

The Chair

Mr. Martin Taller

1630

Mr. Pierre Paquette

Mr. Anthony Pollard

Mr. Pierre Paquette

The Chair

Mrs. Michelle Mulder

Mr. Pierre Paquette

Mr. Anthony Pollard

Mr. Pierre Paquette

The Chair

Mr. Pierre Paquette

The Chair

1635

Mr. Bryon Wilfert (Oak Ridges, Lib.)

The Chair

Mr. Jeffrey Dale

Mr. Bryon Wilfert

Mr. Jeffrey Dale

Mr. Bryon Wilfert

Mr. Jeffrey Dale

1640

Mr. Bryon Wilfert

Mrs. Michelle Mulder

Mr. Bryon Wilfert

Mrs. Michelle Mulder

Mr. Bryon Wilfert

Mrs. Michelle Mulder

Mr. Bryon Wilfert

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

Mrs. Monika Siegmund (Chair, Canadian Income Tax Committee, Tax Executives Institute, Inc.)

Mr. Roy Cullen

1645

Mrs. Monika Siegmund

Mr. Roy Cullen

Mr. Mario Tombari

Mr. Roy Cullen

Mr. Anthony Pollard

Mr. Roy Cullen

Mr. Jeffrey Dale

1650

Mr. Roy Cullen

The Chair

Mr. Roy Cullen

Mr. Jeffrey Dale

The Chair

Ms. Judy Wasylycia-Leis (Winnipeg North Centre, NDP)

Mrs. Michelle Mulder

1655

Ms. Judy Wasylycia-Leis

The Vice-Chair (Mr. Nick Discepola)

Mr. Mario Tombari

Ms. Judy Wasylycia-Leis

The Vice-Chair (Mr. Nick Discepola)

Ms. Judy Wasylycia-Leis

The Chair

Mr. Mario Tombari

1700

The Chair

Mr. Shawn Murphy

Mrs. Monika Siegmund

Mr. Shawn Murphy

Mr. Mario Tombari

Mr. Shawn Murphy

Mr. Mario Tombari

1705

Mrs. Monika Siegmund

Mr. Mario Tombari

Mr. Shawn Murphy

Mr. Martin Taller

Mr. Shawn Murphy

Mr. Martin Taller

The Chair

Ms. Judy Wasylycia-Leis

The Chair

Ms. Judy Wasylycia-Leis

The Chair

Mr. Bryon Wilfert

The Chair

Mr. Bryon Wilfert

1715

1720

1725

The Chair

Mr. Bryon Wilfert

The Chair

Mr. Bryon Wilfert

1805

The Chair

Mr. Monte Solberg (Medicine Hat, Canadian Alliance)

The Chair

Mr. David Chatters (Athabasca, Canadian Alliance)

The Chair

Mr. Pierre Paquette

Mr. Bryon Wilfert

1810

The Chair

Ms. Louise Levonian (Director, Business Income Tax Division, Tax Policy Branch, Department of Finance)

Mr. Pierre Paquette

Mr. Bryon Wilfert

1815

Mr. Pierre Paquette

Mr. Bryon Wilfert

Mr. Pierre Paquette

Mr. Bryon Wilfert

The Chair

Mr. Pierre Paquette

Mr. Bryon Wilfert

Mr. Pierre Paquette

The Chair

Ms. Louise Levonian

1820

The Chair

Mr. Pierre Paquette

Ms. Louise Levonian

Mr. Pierre Paquette

Mr. Bryon Wilfert

Ms. Louise Levonian

Mr. Pierre Paquette

Mr. Bryon Wilfert

The Chair

Mr. Bryon Wilfert

The Chair

Mr. Roy Cullen

Mr. Bryon Wilfert

Mr. Roy Cullen

Mr. Bryon Wilfert

Mr. Roy Cullen

Ms. Louise Levonian

Mr. Roy Cullen

Ms. Louise Levonian

Mr. Roy Cullen

Ms. Louise Levonian

Mr. Roy Cullen

1825

Mr. Bryon Wilfert

1830

Mr. Roy Cullen

Mr. Bryon Wilfert

Mr. Roy Cullen

Ms. Louise Levonian

1835

The Chair

Mr. Peter Stoffer (Sackville—Musquodoboit Valley—Eastern Shore, NDP)

The Chair

Mr. Peter Stoffer

Mr. Bryon Wilfert

Mr. Peter Stoffer

Ms. Louise Levonian

Mr. Peter Stoffer

Ms. Louise Levonian

Mr. Peter Stoffer

Ms. Louise Levonian

Mr. Peter Stoffer

Mr. Bryon Wilfert

Mr. Peter Stoffer

Ms. Louise Levonian

Mr. Peter Stoffer

Ms. Louise Levonian

Mr. Peter Stoffer

Mr. Bryon Wilfert

1840

Mr. Peter Stoffer

Mr. Bryon Wilfert

Mr. Peter Stoffer

Mr. Bryon Wilfert

The Chair

Mr. Peter Stoffer

The Chair

Mr. Bryon Wilfert

Mr. Peter Stoffer

The Chair

Mr. David Chatters

The Chair

Mr. David Chatters

1845

Ms. Louise Levonian

Mr. David Chatters

The Chair

Mr. James Greene (Tax Policy Officer, Tax Legislation Division, Tax Policy Branch, Department of Finance)

Mr. David Chatters

Mr. James Greene

Mr. David Chatters

The Chair

Mrs. Lynne Yelich (Blackstrap, Canadian Alliance)

Mr. Bryon Wilfert

Mrs. Lynne Yelich

Mr. Bryon Wilfert

Mrs. Lynne Yelich

Mr. Bryon Wilfert

Mrs. Lynne Yelich

Mr. Bryon Wilfert

The Chair

CANADA

Standing Committee on Finance

NUMBER 073

2nd SESSION

37th PARLIAMENT

EVIDENCE

Tuesday, September 30, 2003

[Recorded by Electronic Apparatus]

¹ (1535)

[Translation]

The Clerk of the Committee: Hello. I see a quorum. I will proceed with the election of the chair and the two vice-chairs. I will start with the chair. I am ready to receive nominations to this effect.

[English]

I'm going to receive nominations for the election of the chair.

Mr. Murphy.

Mr. Shawn Murphy (Hillsborough, Lib.): I would like at this time to nominate Sue Barnes for the position of chairperson of the committee.

The Clerk: Okay. Are there some other nominations?

[Translation]

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Do you need a seconder for the motion?

[English]

The Clerk: No. The motion is proposed by Mr. Murphy that Ms. Sue Barnes be elected chair.

(Motion agreed to)

The Clerk: I declare Ms. Barnes the duly elected chair of the finance committee.

I am now going to proceed to the election of the vice-chair.

Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): I place the nomination of Nick Discepola as vice-chairman.

The Clerk: It is so proposed by Mr. Pillitteri that Mr. Discepola be elected vice-chair for the government. I declare Mr. Discepola duly elected vice-chair.

I am going to proceed for the opposition vice-chair.

Mr. Casson.

Mr. Rick Casson (Lethbridge, Canadian Alliance): Mr. Chairman, it's my privilege and honour to nominate Monte Solberg as vice-chair for the opposition.

The Clerk: It is moved by Mr. Casson that Mr. Monte Solberg be elected vice-chair.

(Motion agreed to)

The Clerk: I'm going to ask the chair to take the chair.

The Chair (Mrs. Sue Barnes (London West, Lib.)): Thank you very much, colleagues. I appreciate your continued support. I also appreciate the fact that this committee does a lot of hard work.

I just want to let you know that the clerk will shortly be distributing all of the things to help you decide what part of the pre-budget hearings in the east or the west you would like to attend and contribute your expertise to. The clerk has advised me that we still only have three in Fredericton. That's not sufficient from a cost point of view for us to go to Fredericton. I would propose to you at this time that we add them to the Halifax hearings, because we have three in Halifax. Can I get your approval on that so that we can give people the notice?

Some hon. members: Agreed.

The Chair: Thank you very much.

The second week we'll start on the Tuesday. The first week it will be Monday to Friday. It starts early in the morning in Vancouver. Those doing the western leg of that journey will need to know that.

Later today, as you know, there will be votes in the House concerning a finance bill with regard to part of the budget speech last year, the resources bill. A lot of you talked on that in the House last week. I'm going to put out the notice immediately to do a pre-study of the subject matter of that bill later tonight for an hour, for those of you who wish to come to that meeting. It will start either just before the votes or immediately thereafter.

The clerk has also advised me that three witnesses have contacted us--the Mining Association, the Canadian Fertilizer Institute, and L'Essence à juste prix. I suggest to you that we try to accommodate them tomorrow evening. They're all available as one panel, and we can add that.

That would free us at the end of our normal pre-budget meetings on Thursday morning from 12:30 onward to do clause-by-clause, if we're ready and there are no other witnesses. Next week, as you recall, is the only week that you're back here and not on the road. So that would allow people on this committee who wish to speak next week in the House, if it gets back to them that quickly, to be available. Can I have agreement on that?

Some hon. members: Agreed.

The Chair: Thank you very much.

We lost the two meetings this morning because of the technical rules of the House. They will be added to next week.

The notices have gone out for our witnesses, and I see that they're all here. So with your indulgence, we can go ahead with our panels and be mindful of the fact to give them as much time as possible to put their testimony on the record.

We have votes at 5:30, and we do have to at least start the pre-study.

Is everybody in agreement with that plan?

Some hon. members: Agreed.

The Chair: I suspend the meeting, and then we'll call the next meeting to order.

¹ (1539)

The Chair: Pursuant to Standing Order 83(1), we're continuing our pre-budget consultations.

On the panel this afternoon is Mr. Pollard from the Hotel Association of Canada. You have some people with you today. Perhaps you would like to introduce them.

Mr. Anthony Pollard (President, Hotel Association of Canada): Thank you very much, Madam Chair. I believe my colleague from the Association of Canadian Travel Agencies has asked if he could speak in my place. So I'll turn it over to Marc-André Charlebois.

The Chair: I was introducing the whole panel. We have with us from the Ottawa Centre for Research and Innovation, Jeffrey Dale, president and CEO, and Michael Darch, special adviser to the president, Ottawa economic development; and from the Association of Canadian Travel Agencies, Marc-André Charlebois, president. We will have you go first, and then we'll go to the Hotel Association. We also have with us from the Tax Executives Institute, Monika Siegmund, chair of the Canadian income tax committee, and Mario Tombari, vice-president for Canadian affairs; and from the Canadian School Boards Association, Michelle Mulder, president, and Marie Pierce, executive director. Welcome to all of you.

You each have up to seven minutes for your presentation.

We will start with the Association of Canadian Travel Agencies.

¹ (1540)

Mr. Marc-André Charlebois (President, Association of Canadian Travel Agencies): Thank you, Madam Chair.

The association I represent, which is the Association of Canadian Travel Agencies, represents approximately 5,500 travel agencies and more than 25,000 travel agents across the country. We're pleased to have this opportunity to present our comments to the Standing Committee on Finance. Our goal is to put forward solutions designed to eliminate barriers and ensure the optimal development of the Canadian travel and tourism industry.

This industry has experienced difficult times in recent years, with a severe downturn in business across all sectors, due in part to systemic pressures, which I will outline shortly. Airlines around the world are experiencing hardship or facing bankruptcy. Dramatic events, such as the burst of the high-technology bubble, international terrorism, wars, and SARS, have only served to compound the extraordinary problem faced by our industry. We believe that the existing regulatory and fiscal framework that surrounds the industry therefore needs to be adjusted to keep pace with this fast-changing business environment.

ACTA proposes to the government a six-point plan: first, to reduce or eliminate undue fees, taxes, and other burdens on the travel industry. Taxes and surcharges in the form of the air travellers security charge, airport improvement fees, fuel surcharges, NavCan fees, and the GST can almost double the cost of an air ticket. Excessive rents paid to the federal government by airports, along with the excise tax on fuel, are placing an unsustainable burden on Canada's air sector and are also being indirectly passed on to consumers. The result is a downturn in travel that is hurting both the airline industry and businesses such as travel agencies, travel distribution systems, hotels, and attractions that rely on a stable air transportation sector.

From our perspective, concessions from the federal government, while welcome, have been extremely limited. In the February budget the air travellers security charge was reduced from $24 round trip to $14. In July the government announced it would defer airport rents. While we appreciate these initiatives, we believe the government has much further to go. Specifically, we continue to seek elimination of the ATSC, a substantial reduction in the rents paid by airports to the federal government, and elimination of the aircraft fuel excise tax.

Second, in Canada the current government regulatory environment limits foreign ownership to 25% of an air carrier's equity. This regulation makes it difficult for carriers to find new capital and adopt a new business model. Our preliminary assessment points in the direction of an increase in foreign ownership from 25% to 49%. The in-Canada business or commercial presence, employees, and other business activities would remain Canadian and in Canada. ACTA therefore recommends to the standing committee that the issue of foreign ownership of Canadian airlines be examined more closely by the appropriate government body in order to bring more informed debate and knowledge to bear on this issue. This process could lead to a legislative review if required.

Third, transparency in airfare advertising. Another long-standing area of concern for both ACTA and consumers is misleading advertising practices on the part of air carriers. With the many taxes and surcharges hidden in small text at the bottom of an ad and with one-way fares being advertised that are in fact not available, the true cost of an air ticket is hidden from consumers. The frequent response is sticker shock, when potential air travellers walk away in anger at being misled after they learn the actual price they will pay for a ticket. In the fall of 2002 it appeared that Canadian airlines had agreed to a voluntary code of advertising that would have ended these practices. Nothing has happened since then, although Bill C-26 deals with this in detail and would regulate this issue. We don't know what's going to happen to Bill C-26. We believe it is important that advertised airfares include all known taxes, surcharges, and fees and that a clear and unambiguous disclosure of fare restrictions and terms of carriage be found on the ticket.

Fourth, a national passenger protection plan. Only three provinces--B.C., Ontario, and Quebec--have a travel act that regulates relations between consumers, travel retailers, and tour operators and that provides some form of traveller protection against supplier failure. Other provinces are currently unregulated, with no consumer protection or trading rules at all. We therefore ask this standing committee to recommend that the finance minister take immediate steps to fund a federally led task force to develop a strategy and implementation plan for a national passenger protection plan that would shield consumers from airline failure. Until there is such a plan in place and the airlines' financial health and stability are demonstrated, consumers will continue to show uncertainty in buying air travel, with a resulting impact on all stakeholders in the travel and tourism industry.

¹ (1545)

Fifth, implement human resource development programs tailored to the unique needs of the retail travel services industry.

The rapidly changing business model of Canadian travel agencies and the impact of reduced sales due to major external crises have had a dramatic impact on both the number of professionals needed and the required skill sets. The work sharing program in which employment insurance benefits topped up an employee's shortened work week proved to be an excellent short-term measure following the events of September 2001. This was not the case earlier this year when applications from numerous travel agencies across the country were turned down because of the perception of many HRDC program administrators that we were a disappearing sector.

ACTA therefore requests that the committee recommend adequate HRDC funding in areas relevant to the travel and tourism industry.

Sixth—the final point—provide financial incentives and support for the implementation of an essential infrastructure component for travel and tourism product distribution.

With the events of recent years, travel within Canada is very popular; however, tourism operators with product to sell have limited marketing budgets and limited access to this market. ACTA is working with a dedicated group of partners determined to bring about the creation of the Canadian Travel Exchange, or CanTX. Now a registered federal corporation, CanTX is to be a business-to-business wholesale e-marketplace for Canadian travel agents, tour operators, and suppliers. It will distribute Canadian vacation packages and travel products to domestic and international travel agents for retail sale to their customers. The project is now entering the development stage and should be in operation by this time next year.

CanTX expects and has already received some support from the federal, provincial, and regional marketing organizations that promote Canadian tourism. But at this stage, a firm financial commitment to the development and launch of this crucial infrastructure component is required from the federal government. We respectfully ask the standing committee to endorse a financial commitment to bring to market this travel exchange. The current economic downturn in the travel and tourism sector is very clearly a national issue. Such an initiative, therefore, can only be led by the Government of Canada.

These are some of the key issues we believe are relevant to the standing committee's deliberations. Madam Chairman, members, we thank you for the opportunity to present our proposals.

The Chair: Thank you very much.

Now we'll go to Mr. Pollard from the Hotel Association of Canada.

¹ (1555)

The Chair: Thank you very much.

From the Ottawa Centre for Research and Innovation, Mr. Dale, are you going to start the presentation?

Mr. Jeffrey Dale (President and CEO, Ottawa Centre for Research and Innovation): Thank you very much, Madam Chair. Good afternoon, everyone.

The Ottawa Centre for Research and Innovation is the local economic development agency for the Ottawa-Carleton area. We have over 650 members. They are from business as well as from the educational organizations—the K to 12 as well as the post-secondary—and from research organizations both federal and provincial, as well as all three levels of government.

Our mission is to help Ottawa-based companies compete on a global basis, but at the same time to ensure that our local economy and the fabric of our economy stays and that we maintain our high quality of life.

Last year we were here at this committee and at that time were presenting to you some of our preliminary thoughts in support of Canada's innovation strategy, which was released by Industry Canada and HRDC.

This year we are here again with our paper, and hopefully you have it in front of you. We are continuing with some of the themes that were in that paper from last year, hoping they can be addressed this year in the upcoming budget.

Three of those items that I'd like to highlight are these. We support the CATA, ITAC, and Conference Board suggestions for changes to the scientific research and experimental development tax credit systems.

We also look for tax changes and provisions to support angel investing. Angel investing is the investment in small and medium companies in Canada that help them to be the fabric in growth. Right now they represent well in excess of 90% of the businesses that operate in this country. We need to do more to ensure that they have a constant flow of capital.

The third point I would like to re-support from last year's documentation is the support for commercialization—looking for new ways to commercialize the incredible investments that Canada has been making in base research within the academic institutions as well as within our federal research labs.

Now is the time to look for ways that we can capture the value of that research. We can commercialize it to the benefit of all Canadians and begin to generate wealth in new products and services that we can market on a global scale.

This year what I'd like to focus the next couple of minutes on is the reason why we're here today, which is to talk about community capacity building. When you look at communities today—and the innovation strategy was paramount in helping us to get our community of Ottawa together....

It was Ottawa-Gatineau that got together—businesses, government, other agencies—to look at what we need to do to ensure that we remain globally competitive and at the same time have a sustainable economic development strategy.

What we want to do is be able to form and develop unique solutions for Ottawa, just as other communities are striving to develop unique solutions for their communities. Some of the challenges we face in doing this are that many of the government programs are stovepiped around certain initiatives that have to be national in nature and ubiquitous in their implementation. Not all communities are ubiquitous across the country. Many different driving economic factors face them. Labour markets differ from region to region, from city to city. The requirements to shift your labour market—to change your labour market in challenging times—differ because we do not have the same economic base.

We need to have programs that are flexible enough to allow each community to put forward its opportunities and its ideas for how it's going to reface and reshape its own economy. We need to look at how we're implementing broadband solutions and applications within the communities that will support each of the individual communities' development, be it in e-government, e-health, or e-education—some of the key features that will allow us to prosper and to grow our economies and our communities.

Third is how we market and position these economies. We do not market and position a business saying, “We are Canadian.” That is something we're all proud of, but in terms of economic growth and community development we have to market ourselves as a region where businesses are going to be known for a certain key strength—for their clusters, for the skill sets they have, and their ability to create more products and more services on a sustainable basis.

What we're looking for is a new framework for communities to work with the government, a framework that will allow a community to put together an overall plan—a plan that will include re-looking at skills development initiatives, that will re-look at market positioning initiatives, that will re-look at how we attract capital, how we attract people to the regions.

º (1600)

We're looking for a framework that will allow us to come to the government with a problem and a potential solution that will then break down those stovepipes of the individual programs that exist on a national basis.

We believe this is the way of the future. We believe the municipalities and the report, “Canada's Urban Strategy”, support this type of initiative: that we look to new ways of dealing with the urban setting.

I thank you. I hope you have a chance to read our brief. It contains more detailed information.

The Chair: Thank you very much. The briefs have been distributed for today.

Now we'll go to the Tax Executives Institute, Inc.

Monsieur, commencez, s'il vous plaît.

Mr. Mario Tombari (Vice-President, Canadian Affairs, Tax Executives Institute, Inc.): Madam Chairperson, members of the committee, good afternoon.

My name is Mario Tombari. I'm pleased to be here today to testify on behalf of the Tax Executives Institute in my capacity as TEI's vice-president for Canadian affairs.

With me today are Monika Siegmund, who is chair of TEI's Canadian income tax committee, and Jeff Rasmussen, TEI's tax counsel in Washington, D.C.

Tax Executives Institute is the pre-eminent association of business tax professionals. TEI's 5,400 members work for 2,800 of the largest companies in Canada, the United States, and Europe, with representatives from a broad cross-section of the business community.

Our Canadian members contend daily with the complex provisions of the Income Tax Act and Excise Tax Act and, with chapters in Montreal, Toronto, Calgary, and Vancouver, make up approximately 10% of TEI's memberships. Although my comments today reflect the views of the institute as a whole, these views are guided and informed by TEI's Canadian members.

TEI commends the Standing Committee on Finance for holding pre-budget consultations again this year. The consultations provide an important avenue for the committee to gather input from a variety of Canadians in all walks of life. As at last year's hearing, TEI has several recommendations for tax policy and administrative changes that we believe will foster economic growth, create jobs, and simplify the tax laws. Moreover, we believe our recommendations will diminish the cost of tax compliance and administration for the benefit of taxpayers and government alike.

First, TEI is concerned about the notice of ways and means motion tabled in the House of Commons in October 2002 that would implement legislation in respect of foreign investment entities and non-resident trusts. TEI has participated in several consultations with the Department of Finance on this legislation, and a copy of our most recent comments and recommendations to the Department of Finance was submitted with our written brief.

Fundamentally, the draft legislation remains unworkable. We again urge the government to withdraw it, because it would apply to numerous compliant taxpayers who are not transferring assets abroad in order to circumvent the tax laws.

The proposed legislation is over-broad, confusing, and extraordinarily complex, overlaps the foreign affiliates regime as well as section 17, and will interfere with many legitimate commercial transactions. The information necessary to comply with the proposed legislation's many reporting requirements, as well as its relieving provisions and elections, is either unavailable generally or likely unavailable to a Canadian taxpayer who is a minority investor and lacks control of the entity. The government resources required to audit the compliance with the proposed rules would be out of proportion to the policy goals served.

Finally, the Department of Finance has been fine-tuning the proposed legislation for more than three years. Given its mind-numbing complexity, taxpayers need time to digest and understand the legislation and, where possible, modify company information systems to capture and report the additional required information. If the legislation is not withdrawn, the proposed January 1, 2003, enactment date must be postponed.

Next, we note that the recent federal budget legislation has focused on aligning Canada's tax rate structure to be competitive with that of other jurisdictions. To assess the competitiveness of the tax system and its relative burden, the government must consider not only the rate but also the tax base. TEI regrets that the Canadian tax system for tax loss utilization within corporate groups is too restrictive, inefficient, and subject to administrative uncertainty. To be globally competitive, TEI recommends that Canada implement a formal loss transfer system providing group tax relief amongst related corporations. This would bring the Canadian tax legislation in line with that of other countries in the world.

In addition to the foregoing legislative recommendations, there are several areas where the administration of the Income Tax Act has not kept pace with the changes in the global economy and for which compliance costs are excessive. TEI submits three recommendations for the standing committee to consider.

First, withholding taxes imposed on the provision of business services by non-residents under Income Tax Regulation 105 should be eliminated. In many cases an indemnification requirement imposed by the non-resident service provider will shift the economic cost of the withholding tax to the Canadian service recipient. That added tax cost imposes a substantial economic disadvantage compared with business competitors in the United States and elsewhere. We urge the standing committee to recommend repeal of regulation 105.

º (1605)

Second, cross-border trade is an important factor contributing to Canadian prosperity. Among the complex rules governing international trade are the tax treaties Canada has negotiated with its trading partners. The treaties supplement Canada's international tax rules and provide a mutual agreement procedure for resolving tax disputes where Canada and a foreign government assert authority to the same income. Under the mutual agreement procedures the competent authorities for Canada and foreign governments endeavour to negotiate and resolve their disputes, but there is no certainty for taxpayers that double taxation of their income will be eliminated. To ensure that double taxation is eliminated, TEI has recommended that the Department of Finance include a binding arbitration provision in Canadian tax treaties whereby, subject to the taxpayer's consent, the competent authorities would agree, if they are otherwise unable to resolve a matter, to submit a case for binding arbitration.

The final administrative recommendation relates to the rules for reporting the activities of foreign affiliates of Canadian-based companies. We believe these rules are extremely burdensome and the cost of compliance excessive. We have submitted detailed recommendations to CCRA and the Department of Finance for improvements. We request that the committee recommend that the CCRA and the Department of Finance review the scope and nature of the information reporting requirements for form T-1134 for foreign affiliates and simplify the rules.

In conclusion, I wish to commend the committee for its role in facilitating the repeal of the large corporations tax. During the pre-budget consultations last year, many groups, including TEI, noted that the LCT and other capital taxes are a significant impediment to investment in Canada. Indeed, because the tax is so counterproductive, we encourage the committee to consider whether federal budgetary conditions will permit acceleration of the reduction and repeal of the LCT. In a letter to the Minister of Finance, TEI recommended that the LCT tax be reduced to 0.1% for 2004 and eliminated in 2005. Accelerating the repeal will hasten investment in Canada by Canadian and foreign firms and spur job growth.

On behalf of TEI, thank you for the opportunity to participate in this year's hearings. Ms. Siegmund and I will be pleased to respond to any questions you may have.

º (1610)

The Chair: Thank you very much.

Now we'll go to the Canadian School Boards Association and their president, Ms. Mulder.

Mrs. Michelle Mulder (President, Canadian School Boards Association): Thank you very much, Madam Chair, and congratulations on your re-election as chair of the committee. Thank you to the members of the committee for this opportunity to speak to you today on behalf of the Canadian School Boards Association.

Our association is the national voice of school boards. Together, the 10 provincial school board associations that make up CSBA represent over 350 school boards, serving approximately four million elementary and secondary school students and their parents, your constituents, from across the country. Like Mr. Pollard's association, we too have a presence in every single riding in Canada.

You may wonder why the Canadian School Boards Association is making a presentation to the federal government, but the education of our children is not just a provincial concern. Federal decisions affect school boards in a number of areas. Some of these, such as official languages, immigration, on- and off-reserve aboriginal issues, children at risk, early childhood development, and Internet connectivity, have an impact on the role of school boards in ensuring that all children's needs are met. Other issues, such as employment insurance, the GST, and copyright, have an impact on the governance role of school boards. And by the way, collectively, school boards are one of the largest employers in our nation.

Canada is currently enjoying a comfortable level of economic prosperity. Although we continue to live in uncertain times, Canada has weathered the storm fairly well thus far. If the goal of government is indeed to improve the standard of living for all Canadians, we must begin with the children and youth who will carry our country forward. The Canadian School Boards Association commends the government on its continued commitment to do more for Canada's children, but the long and the short of it is this. The federal government needs to increase the national child benefit to ensure that families are able to break through the welfare wall. The federal government needs to work with provinces and territories in order to ensure that the national child benefit and early childhood development initiative dollars reach those children who are in need. Quite frankly, ladies and gentlemen, more and more children in Canada are living in poverty, and school boards deal with those children and their issues on a daily basis. The federal government needs to put in place adequate accountability and reporting measures. One such option would be to create a commissioner for Canada's children.

We particularly welcome the government's move to address the gap in life chances between aboriginal and non-aboriginal children. However, we note with some concern that the initiatives designed to address the gap between aboriginal and non-aboriginal children are aimed solely at on-reserve students. The federal government must ensure that its initiatives close the gap in life chances for all aboriginal children, off reserve as well as on reserve, putting them all on an equal footing with children elsewhere in Canada.

CSBA thinks highly of the federal government's renewed emphasis on bilingualism and linguistic proficiency in both of Canada's official languages. We urge the government to continue to support instruction in the language of the minority, whether it be English or French. We are very pleased to see that the emphasis on linguistic efficiency in both official languages has finally been extended to include new immigrants to Canada. CSBA urges the federal government to ensure that appropriate levels of funding are available to school boards through transfers to the provinces and territories to address language training for the ever-increasing numbers of immigrant students.

CSBA also supports the federal government's efforts in helping to make Canada one of the most connected countries in the world. The federal government has shown strong leadership with Industry Canada's SchoolNet program. However, the rapid pace of technological change makes it difficult to provide all students with high-speed broadband access at an affordable price using up-to-date equipment and software. We recommend that the federal government work closely with the provinces, territories, and school boards, as well as with the private sector, to develop a coherent strategy for making broadband access widely available at a reasonable price to all public educational institutions by the year 2004.

Boards across the country continue to do their best with tight budgets, delivering the best possible programming with the money available, but quite frankly, recent federal decisions will make school board operations more difficult. The Canada Customs and Revenue Agency has advised school district 57 of Prince George, British Columbia, that it will be assessed $80,000 for unpaid GST related to vending machine sales, concession sales by parent volunteers, janitorial charges stemming from a joint use agreement with the municipality, and the rental of facilities. The sale of soft drinks and hot dogs by parent volunteers and the commissioned profits from vending machines have been interpreted as being in direct competition with fast food outlets. If the proposed assessment scheme is upheld, it will impair the ability of parents and student councils to generate money to support important extracurricular activities. We believe this is an issue of national significance, in that school boards across the country encourage volunteerism and external fundraising to support school and student initiatives. Ladies and gentlemen, quite frankly, the money raised in no way competes with other businesses. Schools and school boards should be exempt from paying GST on these activities.

º (1615)

In closing, CSBA strongly urges you, in making your recommendations to the federal government for the upcoming budget, to recognize that children and youth are a high priority. Please note that the decisions you make here have a direct impact on how school boards do their work in their local communities.

I want to end, if I may, on a personal note. A year ago, last October, I had a tremendous opportunity. I was able to travel with Alberta's Minister of Learning and education service providers from the K to 12 sector and post-secondary sectors to Southeast Asia. What I learned there was quite phenomenal. I learned that no matter what filter education is looked through, whether it be encouraging critical thinking skills and flexibility of workplace choices in students, as we heard in Japan, through the filter of poverty reduction, as we heard in Vietnam, keeping students academically on the leading edge, as we heard in Thailand, or in China keeping their students and their society on the leading edge in the competitive global marketplace, everyone, from high-level ministers to the man on the street, believed education was the key to keeping their country focused, strong, healthy, and competitive and improving their societies into the future.

What did I learn? I came home to Canada and I thought, we have an absolute jewel here. Our public education system is strong. It can improve, no doubt about it, but our students in Canada are on the leading edge in the world, ladies and gentlemen, in terms of international test results, in terms of competiveness. Why on earth would we ever put those systems at risk? My message is, we need to work together, and the federal government definitely has a role, so that the decisions you make as a federal government support the provinces in spending their education dollars wisely and ultimately support school boards in our role at the community level of providing better and better opportunities for all Canada's students.

I thank you again for this opportunity, and thank you for listening.

The Chair: Thank you.

Thank you all for sticking pretty close to our timelines. I'll ask our colleagues to do the same, up to seven minutes, having regard for the fact that in about an hour the bells will be ringing.

Mr. Rajotte.

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Thank you very much, Madam Chair.

Thank you very much for coming in and for your excellent presentations. I found them very informative.

I want to start with Mr. Dale with respect to the SR and ED tax credit. The things you propose and ITAC has proposed I'm very sympathetic towards. There are a couple of questions. In your fourth point you talk about simplifying this tax credit system to make it easier for investors and entrepreneurs. Can you give us some specifics as to how we could simplify that tax credit?

º (1620)

Mr. Jeffrey Dale: The SR and ED tax credit system is quite complicated in respect of the federal and the provincial coordination that has to happen. We'd like to see some of the mechanisms for how, when it clears the federal, notification can be provided to the province. It would also help to clear the provisions within the province. Forms are changed quite often there. As a matter of fact, there was a form change, I believe, in June of this year, so that now none of the other forms everyone had work. Claims are being rejected because of form changes that happened here. The process itself can be quite complicated. Many small firms that try to apply for this just do not have the capability of doing it, because of the complicated rules. Very often they find themselves having to pay a large amount for professional services to do something they thought was very simple.

So there are a lot of small steps that could be made there.

Mr. James Rajotte: If we as parliamentarians decide then to adopt some of these recommendations that you're proposing, have you done a cost analysis? Obviously it would be an estimate at best, but have you estimated, if we did make these changes, what the cost would be?

Mr. Jeffrey Dale: No, OCRI has not done a cost analysis of what these changes would be, but I believe at CATA and in the alliance and ITAC papers they go into much more detail of the cost allocations for these.

Mr. James Rajotte: Okay.

Just as a last question, when you talk about commercialization, a lot of people talk about it, but it's getting into specifics that causes the problems. One of the things they have at the University of Saskatchewan is an innovation centre where they allow investors to actually go around and observe what researchers are doing. They have a patent office linked right to the innovation centre.

Is this the type of thing you're talking about, or is there something else you have in mind with respect to commercialization?

Mr. Jeffrey Dale: This could fill many hours of conversation. This one is very near and dear to my heart. The commercialization activities that are going on right now, as you talk about, are predominantly based on our academic institutions or on our federal labs, where it's a push out of technology. We have an idea and we are sending it out to an industry or a company to take a look at. I call that “push”.

What we're proposing in here is that this works very well, and we should continue to support universities and colleges to do those tech transfer activities. At the same time, there's a need from an industry perspective to look at how we can do a pulling out of the technology that we see and we want. Companies today are going to where they think they have the skilled people and they're also going to where they know they're going to have the research that's going to be available to them to support their next product innovations.

Nortel here in Ottawa is an example. It used to have 55 people in their tech transfer department. That was a group that worked with a number of universities and colleges across Canada. As we all know, Nortel has declined, and that group is now down to five people. They're looking for a new model. Actually, they're working quite closely with us, saying they'd like an industry-perspective model that looks at their requirements as an industry, and they'd like there to be some type of capacity from a regional perspective, or Ontario or even national, to go out and pull out where that technology may lie or where a researcher may be in order to connect to that. That will extract value out of the research institute, will allow it to be either commercialized by an organization--for example, a company could license the technology--or spun off into some form of new corporation or new technology company.

Mr. James Rajotte: So you would then support what the federal government seems to be doing with certain universities, which is focusing on.... For instance, at the University of Alberta they focus on nanotechnology, and at the University of Saskatchewan it's the synchrotron. That way, investors across the country know exactly where to go if they want to focus on a certain type of research.

Mr. Jeffrey Dale: There are some very innovative examples happening in, as you said, Alberta and Saskatchewan, and Quebec did try some at a provincial level as well. Those are interesting initiatives that should be built upon, should be looked upon as models, and looked at for best practices in terms of what will be implemented further.

Mr. James Rajotte: My next set of questions is for Mr. Charlebois from ACTA. You talk about the foreign ownership limits for airline ownership. That's something the industry committee recently looked at with regard to telecommunications. You didn't mention a figure; you just mentioned that the federal government should examine this issue. Do you have a figure in mind as to a certain percentage? Would you recommend removing them entirely? Would you recommend perhaps going to 50% from 25%?

º (1625)

Mr. Martin Taller (Vice-President, Policy, General Manager, Eastern Canada, Association of Canadian Travel Agencies): Madam Chair, I'd like to introduce myself. I am Mr. Charlebois' vice-president. Due to the lateness of the hour, Mr. Charlebois has gone off to the airport.

To respond to your question, when our association looked at it, we believed the number of 49% would be the reasonable number. That's what's been talked about by industry. However, I think the issue concerning our association is control. Control should remain Canadian, employ Canadians, and allow Canadians to work in Canada. That should be protected. But we do believe the critical infrastructure of the airline industry needs to be improved with foreign investment to stabilize an industry that is, frankly, very short of cash.

The Chair: Thank you.

You have 30 seconds more, if you'd like.

Mr. James Rajotte: Okay.

I'd just like to follow up on airport rents. In discussions with the Edmonton Airport Regional Authority, they say the eight main airport authorities have actually signed an agreement and submitted it to the Minister of Transport, and he has not responded over the past two years. Is that acceptable to you in terms of the airport agreement?

Mr. Anthony Pollard: No, it's completely unacceptable. The reality is that you have airports that were federally owned being turned over to the municipalities. The feds continue to tax them, to the degree that the airports are in many cases close to failure.

You might have heard me say in my comments that Standard and Poor's was saying that unless you increase the airport improvement taxes by 42%, they're going to downgrade the ratings in those airports. Something needs to be done immediately.

Mr. James Rajotte: I think the eight airports have actually agreed on a tax reduction and submitted that to the minister, but they have not had a response to that. I don't know if they've submitted that to you for your review or not, but they've called for a reduction in airport rents, just as you have.

The Chair: Thanks very much. Your time is now up.

Did you want to make a quick response to that, Mr. Pollard?

Mr. Anthony Pollard: The fact of the matter is that the government has deferred the rents by $80 million for a couple of years. They're still going to have to pay them out. We have all these beautiful facilities now around the country that are going to be opening up shortly. We can't sustain them the way they are right now.

[Translation]

The Chair: It is now your turn, Mr. Paquette.

Mr. Pierre Paquette (Joliette, BQ): Thank you, Madam Chair.

To follow up along the same lines, the Canadian Association of Travel Agents, in its brief--and you just talked about the very precarious financial situation of several regional airports--suggests to eliminate the air travellers' security charge. I fully support this recommendation.

Does this security charge that is imposed even in our local airports have a specially heavy impact on those people who need to frequently travel by air to larger centres for business meetings, for their work or just to access services? Have you heard any comments in this regard, especially from remote areas in Canada and Quebec?

[English]

The Chair: Go ahead.

Mr. Martin Taller: Our association has not done any in-depth research in this area. However, the regional airports, the local airports, have different security needs with different requirements. The security surcharge is a charge levied against all travellers boarding at airports. Now the real issue is should this be a charge levied on the traveller or should it come out of general revenues?

I'm not sure if Mr. Pollard would like to comment on it as well, but in terms of regional airports, we believe they should be equal to all airports in Canada.

º (1630)

[Translation]

Mr. Pierre Paquette: Also in your brief, you call for eliminating the excise tax on aviation fuel. Is this the 1.5¢ a litre tax that was added by the federal government in order to reduce the deficit? Since we have not had a deficit for at least seven years, do you find it normal the government has maintained this tax?

[English]

Mr. Anthony Pollard: To me it's analogous to the introduction in 1916 of income tax, which was supposed to be a temporary war measure to be able to get us through the war. The last time I looked, we were all still paying income tax.

The reality is that this excise tax was introduced, I believe, about 1980 or 1981 for deficit reduction purposes. So we couldn't agree with you more. I mean, at the end of the day, we aren't operating in a deficit situation. We have an industry that is in terrible shape. It's something the government could take immediate action on.

[Translation]

Mr. Pierre Paquette: Thank you.

I found it interesting that the briefs of two witnesses representing very different sectors, those of the Hotel Association and the School Boards Association, mention the issue of employment insurance premiums and I fully agree that there is a problem.

In the case of the Canadian School Boards Association, your position has been very well articulated. First of all, you take issue with the fact that 45 billion dollars have been diverted from the uses for which these monies were contributed by employers and employees. Your brief mentions a surplus. I imagine this would be a reasonable reserve fund in order to avoid having to increase premiums in times of economic downturns. I wonder if you have any idea of the total amount of this reserve fund.

I also have a question for the Hotel Association of Canada. You call for a premium reduction of 20¢. I fully agree with you. I imagine your position is that employment insurance premiums should provide just enough to fund the plan and pay out the benefits as well as a reasonable reserve fund for future contingencies. But the way things have been done since at least 1994, with a totally arbitrary setting of rates, is unacceptable. As you say in your brief, those rates should be set on the advice of independent experts.

I would like both associations to elaborate on their views regarding the employment insurance scheme and its purposes.

[English]

The Chair: Ms. Mulder.

Mrs. Michelle Mulder: Thank you very much.

You've raised some very interesting points. As an association, we believe there should be some mechanism for consultation with various groups to ensure that the word “reasonable” is appropriately defined in terms of what would be a reasonable reserve fund in order to adequately address the needs of all partners. It's a question of balance.

That's not a definitive answer for you, but we very definitely feel that the amount that's there now, or a portion, should be returned to the employers, particularly in our instance with school boards, that would enable other funds to be put toward educational purposes. Of course, I did mention at the beginning of my presentation that Canada's school boards make up one of the nation's largest employers, so the amount of dollars in overpayment is a significant one.

I don't have those details in front of me, but I'd be happy to provide them to you at a later date.

[Translation]

Mr. Pierre Paquette: Maybe the government should return the 45 billion dollars it diverted and in all likelihood school boards would get a good chunk of that money to use for education purposes.

How about the Hotel Association of Canada?

[English]

Mr. Anthony Pollard: Well, when you have $45 billion sitting there...and we have so many other requirements out in the country where that funding could be placed. That obviously is something that gives us a great deal of concern. So to go out and state unequivocably that there should be a reserve of $20 billion or $30 billion, pick a number....

Every time we approach the Department of Finance on this, as we've been doing repeatedly for several years, we keep getting push-backs: “We need this to be able to guarantee the future. It's an insurance program. We have to have it for general operating funding.”

Our recommendation is that you could probably cut it in half in terms of the reserve and it would still be sufficient to be able to maintain what we require in this country and what you would personally require as an insurance program, which is basically what it is.

[Translation]

Mr. Pierre Paquette: Thank you.

The Chair: Thank you. That is all.

Mr. Pierre Paquette: Come on, I barely started!

[English]

The Chair: It was seven minutes.

Mr. Wilfert, please.

º (1635)

Mr. Bryon Wilfert (Oak Ridges, Lib.): Thank you, Madam Chairman.

First of all, I'd like to thank everyone for their presentations. I found them most interesting.

To the hotel association, just a quick comment on the EI-setting process. As you know, because I believe you were a part of it, the minister set up a very transparent process. He had all the stakeholders meet. We are going to have a new EI-setting regime by 2005. I think the minister has been very clear on where he wants to go with the direction of EI. It probably will address a number of the issues you have raised.

As you know, it doesn't sit in some separate account. The Auditor General made it very clear in 1987 that we couldn't do that. Obviously this money does collect interest, yes, and it's used for all sorts of purposes. However, I think the minister has made it very clear, and he's had expert advice on what to do. This has been a firm commitment. So in terms of that issue, hopefully we will see some very positive results and hopefully you'll be back to tell us that you agree with what has happened.

On airports, as you know, we have moved in a number of areas. You recognized the reduction in the one area. You know there was announced an $80 million transfer, temporary, for the airports in terms of the issue of a financial relief package over the summer. Clearly, yes, we'd like to do more, but again, we don't want to go into a deficit. We have to make sure that if you're going to lose $1 billion here you're going to make it up somewhere else. That's the nature of the business.

Obviously we're very concerned about the situation with the hotel industry. Clearly, part of it, and I would agree with you, is that in tourism, what is the right level of money we should have in there? How should it be best utilized? How do we do it constructively and collaboratively with our partners, including with your association, the provinces, cities, or whatever it happens to be? Just putting money into it isn't going to solve the problem, so how do we do that? There are many factors, clearly. Americans are staying home generally, and not just from Canada. They're staying home from Europe and other places, for whatever reason. The fact is that you're an industry we obviously need to pay close attention to, and obviously your presentation is going to be helpful in that regard.

In the area of the Ottawa Centre for Research and Innovation, you've put some very interesting ideas on the table but with no figures. I can't work without figures. Can you tell me if you can present some to this committee at some point? In here you say, “Increase funding in the various federal research grant programs to specifically address commercialization of all stages of research.” What's the dollar figure? You say, “The federal government should eliminate its tax on capital gains arising from investments in small growth companies”, to which I'm sympathetic, personally, but what's that going to cost us?

So what are your priorities for the national treasury in terms of what would be best to stimulate your industry? You have a number of key recommendations here. How would you prioritize them?

The Chair: Go ahead, Mr. Dale.

Mr. Jeffrey Dale: Thank you.

Can I ask one clarification question? Can you give me the ones you want me to prioritize? Is it all of these?

Mr. Bryon Wilfert: The two I gave you are at the bottom of pages 3 and 4 of your brief.

Mr. Jeffrey Dale: On commercialization, I don't have the recommendations for net new money that would flow into such programs as CFI, SSHRC, the Canadian Institutes of Health Research, or the major granting programs. We have suggested here that the expenditures in the IRAP program be doubled. I believe IRAP--excuse me if I'm wrong--is a $25-million- or $30-million-a-year program, and I know they have recommended it be doubled in size, in terms of costing.

Mr. Bryon Wilfert: Is that for one year, or are you looking at each year it would be part of the...?

Mr. Jeffrey Dale: NRC has specifically come back and asked for doubling of that program once. They believe that providing industrial research assistance to the ever-growing number of small startup companies is extremely beneficial.

I'll just add one small piece. In Ottawa we have seen a 50% growth in the number of technology companies since 2000. The people who have been laid off have actually started up their own companies. They are looking at new ideas and new products and are starting to form new innovation.

I do not have the amounts for the angel investment. We're a small organization that does not have the research staff to look at the cost of some of the delays here. We're looking at the rollover provisions. I know that the costing has been done for the tax rollover provisions for investments in small companies, in Canadian-controlled companies. We're looking to extend that rollover provision there, so I do not know what the estimate would be if we extended the current 120 days to a year.

º (1640)

Mr. Bryon Wilfert: On the school boards, without opening the MUSH sector up—and I hope that's not what you're trying to do--

Mrs. Michelle Mulder: What is the MUSH sector?

Mr. Bryon Wilfert: The MUSH sector is municipalities, hospitals, universities, school boards, etc.

On the school board exemption for support for student programs, I'm intrigued by your comments and welcome any dollar figures you can provide us on that. I wouldn't want to see this as a wedge issue that suddenly opened up, because we've been on this one before and we know what's happened since 1991. I don't intend to revisit it with you, municipalities, or anybody else.

Mrs. Michelle Mulder: Thank you.

So this is the $80,000 on the GST issue that you're referring to.

I'm sorry, I didn't quite catch your question. What is your question?

Mr. Bryon Wilfert: What would the impact be on us if we were to do this, and is this a wedge issue? What are the financial implications? Have you costed it out at all?

Mrs. Michelle Mulder: We haven't costed it out right across Canada. We know that the Prince George school board has been assessed $80,000, and that's strictly on hot dog sales, the sale of school clothing, vending machines, and a couple of other little items. The assessment went back for just over...actually, I'm not sure. I can get you that information.

But the impact would be huge nation-wide, and I'm not going to try to fluff over that. There would be a huge impact. If $80,000 is for one not very large area, I quake to think what the assessments would be for the school boards of Toronto, Montreal, or Calgary, for example.

Is it a wedge issue? I would say it probably is, because hospitals, of course, have vending machines. Hospitals go out and do volunteer fundraising activities. Are they being asked to submit GST on those sales? I don't know, because my focus is the school boards across Canada, but certainly this is an issue that is causing us a lot of concern.

That $80,000 can go into other programs, such as early initiative programs, poverty reduction programs, English as a second language, or francization programs. There's a plethora of things that money could be used for instead of being paid back on sales that, quite frankly, do not impact the fast food chain outlets, particularly in our rural areas.

Mr. Bryon Wilfert: It wasn't the fast food chains I was concerned about; it was the national treasury.

Thank you.

The Chair: Thank you both.

I will go to Mr. Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chair. Thank you to all the presenters.

Ms. Siegmund, in your brief you talked about the notice of ways and means motion for changes to the foreign investment entities and non-resident trusts, which is a fairly complicated, somewhat arcane area of tax, I suspect. When Canadian taxpayers are moving money into offshore trusts or accounts, do you have any concerns that they might be doing that to evade tax in Canada?

I ask you that because the OECD countries are certainly concerned that there is a lot more money moving out of the developed world into tax havens to avoid tax in those countries. They're trying to make the process more transparent, as you know, and more forthcoming with information from these offshore banking centres. Certainly, just anecdotally, it seems to me that more money is moving out of Canada to offshore tax havens.

Would you agree with that or not? If so, is it just the modalities, in terms of what's being proposed here, that you're concerned about?

Mrs. Monika Siegmund (Chair, Canadian Income Tax Committee, Tax Executives Institute, Inc.): TEI represents compliant taxpayers, by and large. We represent large companies, and we believe that the Income Tax Act, as it stands right now, already has sufficient rules and anti-avoidance rules to prevent that. Those rules could be applied to prevent that or to tax that income, if it is properly taxable in Canada. We do not believe that the complexity of the foreign investment entity rules and the non-resident trust rules is warranted.

Mr. Roy Cullen: You said it would apply to numerous compliant taxpayers who are not attempting to avoid Canadian tax by transferring funds to offshore trusts or accounts. When you say “offshore trusts or accounts”, they're not necessarily tax havens. So if Canadians are transferring funds offshore to tax havens, give me an example of why they would not be trying to avoid Canadian tax.

º (1645)

Mrs. Monika Siegmund: Canadians are responsible for paying tax on their worldwide income. Most corporate taxpayers, certainly the ones we represent, would most definitely be paying tax on their worldwide income.

Mr. Roy Cullen: But then you also mention the reporting provisions, which you see as somewhat onerous. Presumably the Government of Canada is interested in strengthening that reporting regime so the taxpayers feel perhaps more obliged to report their world assets, so they can then, by definition, hopefully report their world income.

I understand that reporting might be a bit onerous, but are you saying that the whole process is not necessary?

Mr. Mario Tombari: We're saying there are current provisions in the Income Tax Act that deal with situations where funds are transferred offshore. The provisions that will become effective January 1, 2003, are not really required to get the job done. The legislation is extremely complex. It is difficult to understand if it applies, and if it does apply, how to comply.

Mr. Roy Cullen: Okay. Thank you. I may not agree with you, but it would be useful to have a more fulsome conversation on this. It's a very complicated area of tax.

Mr. Pollard, I just want to correct you on one thing, if I may. I think you mentioned that the 1.5¢ excise tax on fuel was introduced in 1981. It was actually brought in under the Progressive Conservative administration. That's not to say we shouldn't be looking at removing it, because as was pointed out, we have had surpluses for many years, but it's a cost item of about $800 million a year, and of course it gets into the queue of other demands on the treasury.

I am very concerned about the impact on the hotel association. In fact, in my riding, where we have a lot of airport hotels, the Regal Constellation has just shut down. It was huge and took so many conventions. That's clearly sending a signal that hotels are hurting.

You're recommending more money for the Canadian Tourism Commission, which I think would be useful, but are you actually seeing tangible benefits from the work of the Canadian Tourism Commission? Are you telling us that another $30 million would actually increase business for your members?

Mr. Anthony Pollard: If you look back to before the days of the Canadian Tourism Commission, in 1994 we had a travel deficit in Canada of $5.8 billion. The travel deficit today is in the area of $2 billion. The federal government at the time, prior to the investment in the Canadian Tourism Commission, was spending about $15 million annually to promote tourism. Today they spend about $83 million, and that is matched by the industry.

The reality is that the Canadian Tourism Commission works. There are areas for improvement, there's no doubt, but if an investment of $60 million has brought the travel deficit from $5.6 billion down to just over $2 billion--hey, that's pretty neat ROI, in my view, Mr. Cullen.

Mr. Roy Cullen: Yes, well, I'd agree. I'm glad to hear you say that.

Mr. Dale, the government brought in the tax free rollover on capital gains for qualifying investments, which are essentially pretty broadly defined. In your first recommendation you say eliminating capital gains completely would be better than a tax free rollover. I just want to make sure I'm clear on your recommendation.

Are you saying we should first of all broaden the application of the tax free rollover? Are you also saying that in lieu of that, or even better than that, would be to eliminate the capital gains tax completely on qualifying investments? Am I mixing up two things here?

Mr. Jeffrey Dale: The first provision was to eliminate capital gains on investments in growing, small companies. Most of these provisions are not done on stock trades, they're done on privately controlled corporations. That's what we were trying to get at here.

Alternatively, the rollover provisions we think need to be communicated better. Also, they need to be extended. If you're an investor and you're actually exiting from one investment opportunity...another investment opportunity with your expertise.... An angel has expertise in certain areas, usually. They don't necessarily have the ability to roll over that money within that 120-day period, or they have to pick one that may not be perfect for them. Therefore, we need the provisions extended at least, so they have the time to look at different opportunities that come that meet their expertise, that meet the position of the company they think they want to invest in.

º (1650)

Mr. Roy Cullen: Do I have time for one quick one?

The Chair: Go ahead.

Mr. Roy Cullen: Thank you.

The federal government's departments and agencies spend an awful lot of money on research and development. A bunch of us were involved in an initiative some time ago looking at ways that technology could be commercialized in a better way. Some of the bottlenecks were the intellectual property rights and a bunch of other policy or institutional challenges.

Is the federal government today transferring and diffusing technology better than it has in the past, or are we still in a bottleneck?

Mr. Jeffrey Dale: I don't know if you could say it's better or worse. They're transferring it in the same way, which is, “I have a piece of technology; come and see if you want it”, or “I have a piece of technology and I'm going to try to spin out a company from it”.

Let me state one point that I didn't make earlier. Our provisions here on the commercialization and how we would address this is that there are certain amounts of funds allocated today for technology transfer and commercialization. What we're encouraging is that you not increase the amount of money you put into commercialization, just look at alternative ways you can commercialize.

One is the push out from the institutions or universities. Look at one where the industry is allowed to gather itself and gather its requirements to address what that need is by allocating a percentage of those funds to that method of technology transfer.

The Chair: Thank you very much.

Now we'll go to Ms. Judy Wasylycia-Leis.

Ms. Judy Wasylycia-Leis (Winnipeg North Centre, NDP): Thank you, Madam Chairperson.

I'd like to focus on the issues of children in my seven minutes. I know there are many other issues being raised today, but I find when we're talking about the needs of children--and there are pretty serious issues on that front--everything else seems to pale in comparison.

I'd like to ask some questions of the representatives from the Canadian School Boards Association, but I would love to hear comments from the other presenters about how we as a committee can grapple with these competing choices and demands, especially given the recent talk coming from many circles, particularly Paul Martin and his focus on debt reduction.

We've seen a lot of focus in the past on tax cuts. We had $100 million savings from tax cuts that benefited a certain segment of the society. Now we're hearing about how important debt reduction is, even though Canada's ratio of debt to GDP is at a reasonable level, about 36%--a goal people say is perfectly acceptable, just like a family might have a mortgage to pay for the needs of children.

In that context, how do we actually make sure children's issues are at the top of the agenda? You suggest we have a target in terms of eliminating children's poverty. We had one, you know. In 1989 we said we would eliminate child poverty by 2000. It's come and gone, and in fact child poverty has grown.

What would be your advice? Given this competition of demands and what you've heard today, how do we put children at the top of the agenda?

Mrs. Michelle Mulder: I believe we put children at the top of the agenda because we have to put them at the top of the agenda. I think in my closing comments I mentioned the recognition I came to travelling outside of our country and seeing those eyes looking to Canada saying “We want what you have”. Basically, that's what they were saying--they want what we have. They want our prosperity, our intelligence, our health. The only way they saw of getting to that point was by preparing their children today.

Nowhere was that more evident to me, actually, than in two countries: China and Vietnam. In Vietnam it was because of the intense poverty. They're starting to climb out of that poverty, and it has to do with investment in education programs, primarily. In China, it's because they are a world market competitor and they want to be there and stay there. They see as the key the education of their youth to become more competitive, to live longer lives, to be healthy, and then raise their children that way.

How do we keep children at the top of the agenda? We have to keep talking about our future, our future as old people and who we want to look after us. We want well-prepared professionals--doctors, nurses, caregivers, etc.--looking after us, and those are our children today.

That's a kind of high-level philosophical statement, but I also did hear Paul Martin last week talking about investing in education. That made my heart sing, because politicians don't usually talk about investment. And I'm a politician, by the way. I'm an elected trustee. We don't usually talk about investment; we talk about expenditures, about the Treasury Board, about competing interests.

We have to find a balance. I'm not saying people in the tourism industry should be ignored, but somehow we have to find a balance and make children the top priority. So keep talking with each other and finding that balance.

º (1655)

Ms. Judy Wasylycia-Leis: Would any of the other panellists like to comment on this whole issue of children and competing demands? I guess the question is, would you agree to a hold on any further tax cuts and Paul Martin's agenda of reducing our debt-to-GDP ratio--going back to the sixties with a 25% ratio--if it meant ensuring resources went to children, that we were investing in the future, and creating enormous savings in terms of taxpayers in the long run?

Does anybody want to jump in?

The Vice-Chair (Mr. Nick Discepola): I'll answer that. The answer is yes. I think it's a very evident question, but I think what we're trying to get is an opinion from somebody else, maybe someone outside of this sphere. So, does anybody want to take a stab at that?

Mr. Mario Tombari: I'll take a stab.

I think the proof is in the pudding. I think the person who went to the Far East and came back and reported that we have an effective system--it's not perfect, but it's very effective--proves we are on the right track. We just need to fine-tune it.

On the other hand, with what Mr. Martin was saying regarding deficits and maintaining a balanced budget, you don't want to mortgage our children's future, so we have to keep that in mind. That's going to impact not only our children, but future generations.

Those are my views.

Ms. Judy Wasylycia-Leis: Do I have more time?

The Vice-Chair (Mr. Nick Discepola): Yes, you have one more minute.

Ms. Judy Wasylycia-Leis: Just let me follow up on that, because I think none of us has a complaint with Paul Martin suggesting we have balanced budgets over a cycle. I think the red lights went off when he said he made debt reduction such a high priority when in fact we're at, by all international standards, a reasonable level. We know that to go further in terms of debt reduction and reducing the ratio, we'll have to take it from somewhere.

So, my question to you is wouldn't you, as a member of a family, believe in a mortgage on your house if it meant ensuring your kids got the education they needed or could do the recreational activities they wanted? If you were making hard choices, wouldn't you balance and have a debt as part of your household, so you could still build for your family's future?

The Chair: Go ahead, sir.

Mr. Mario Tombari: I think that our financial affairs have improved. That's a recent situation over the last five years, so the drastic measures required to put our financial affairs in order have been undertaken, and now we can maintain the quality of education for our children.

What comes to mind as a representative of industry is that we live in a global economy, so we have to maintain at both the corporate and individual level tax rates comparable with other countries', because otherwise business will go elsewhere. If businesses go elsewhere, the people, the children of Canada, will not prosper. So we have to keep in mind the standards of living and prosperity, and as we grow and our prosperity and standard of living increase we will be able to maintain and increase the level of education of our children.

» (1700)

The Chair: Thank you very much. That's our time.

Our last questioner on this panel is Mr. Murphy, please.

Mr. Shawn Murphy: Thank you very much, Madam Chair.

I just have a couple of general policy issues I want to explore with Mr. Tombari and Ms. Siegmund that have to do with general tax policy and the raising of funds and the underground economy. As your association is well aware, the government has a number of tools to raise revenues: the income tax; corporate and personal consumption taxes, which would include the employment tax; user fees; and capital taxes.

We've had a very interesting discussion in this panel, and there have been a lot of recommendations to decrease a whole host of user fees, some of which are very legitimate concerns, especially for the hotel industry, which I'm very familiar with. But a lot of the authors who write on these issues and on maintaining an internationally competitive tax system indicate or suggest that we have to perhaps veer away from our reliance on corporate and personal income tax, and perhaps go more towards consumption tax and a fair and equitable user fee system.

Given everything you heard this afternoon, does your association have any policy on this issue?

Mrs. Monika Siegmund: At this time, our association has not addressed the mix of corporate, personal, or consumption taxes.

Mr. Shawn Murphy: You understand where I'm coming from, and you've heard the suggestions here this afternoon. We heard from the friends of airports on airport security fees, and heard about the EI and the Excise Tax Act. If you started to add them up in your head, they would be $4 billion or $5 billion, and we would have to increase corporate income taxes or personal income taxes as a result. We're assuming, and I think everyone in this committee agrees, that capital taxes have to go; they're counterproductive to an efficient economy.

You don't have any comment on that issue?

Mr. Mario Tombari: As I reiterated, the concern I have is that we live in a global economy and that we have to be competitive. We cannot put our heads in the sand. By being competitive, we will attract investment in Canada. That's where our prosperity or per capita income will increase, which will create added revenues for governments to be able to replace other taxes that are being suggested to leave. This at least is our view, that you can't just increase taxes to offset the loss of revenues, because you have to remain competitive. But it's by increasing per capita income, attracting investment, and creating jobs that you create the wealth of the country, and governments will earn additional revenues from this increasing economic activity.

Mr. Shawn Murphy: My secondary question is that I'd like to probe with your association this whole area of the underground economy. Depending on what authors you read, there's a whole segment of our economy out there, ranging from 3% to 10%, that just does not pay taxes. Ms. Siegmund stated that every Canadian is under an obligation to pay taxes, and I think as everyone in this room is aware, there's a certain and growing segment, I understand, that simply does not pay taxes. Mr. Cullen alluded to that, that we're aware anecdotally of people who are aware of the offshore tax havens. When these people, or this segment of the economy, do not pay taxes, it just means that everyone else has to pay more. That's the bottom line.

In my view, the government hasn't been as aggressive as it should be in dealing with this issue. There are a number of tools at its disposal: it can lower taxes, which has some effect; and it can use public education, stricter enforcement, or a whole array of tools to try to capture a large segment of this underground economy.

I'm not suggesting anyone in your association would have anything to do with the underground economy, but does your association have any recommendations to this committee or to this government to deal with this particular issue, which I think is a very important issue?

Mr. Mario Tombari: I think maintaining the level of taxation at a reasonable level contributes to reducing the underground economy. The underground economy is a by-product of excessive taxation, tax rates that are too high, where citizens feel they're not getting their money's worth.

This is just a suggestion, but if you increase tax rates, I believe you're contributing to the increase in the underground economy. Where citizens feel they're paying a reasonable amount of tax and getting a reasonable amount of service in line where there's a correlation, I think the underground economy will be reduced. But I also think it's a fact of life. The underground economy is a form of revolt when the level of taxation is too high.

» (1705)

Mrs. Monika Siegmund: I have an additional comment to make on that. If CCRA is adequately funded, then they are able to enforce the rules we do have. Certainly one of the things our association stands for and promotes is the efficient administration of the income tax system, and that includes the enforcement side.

Mr. Mario Tombari: I have one other point. The points we raise in our submission really deal with the heavy burden placed on compliant taxpayers, taxpayers who pay their taxes. We're paying the price for the underground economy because we're the compliant ones. We're the ones who declare our worldly income and pay our tax on our worldly income.

Mr. Shawn Murphy: I just have a couple of quick questions for the representative from the travel agencies, and they have to do first with the suggestion for an income protection program and second with the unfair ads.

I agree with you 100% on these unfair ads, and they're still going on as we speak, every day. You see them for $99, which doesn't include a whole host of fees, including fuel surcharges, insurance surcharges, you name it. When I read these ads, I see that a lot of them come from the travel industry itself; the agents are doing this. Could your association not have a code of practice you could administer so this just wouldn't happen? Because I don't think it's honourable to do it.

Mr. Martin Taller: Well, we do, and we do have a code of standards and ethics. The complication of advertising is being addressed in Ontario, Ontario being one of the regulated provinces. In fact, Ontario, British Columbia, and Quebec are really the only regulated provinces in Canada. Everywhere else there are no regulations, not only for advertising but for any other kind of consumer protection. This is another area we're working hard on to try to get some kind of regulatory regime to help protect consumers.

Frankly, the advertising issues remain. They were to be addressed by Bill C-26. We worry that this cannot happen, and this section of advertising should be handled separately and looked at directly by government.

Mr. Shawn Murphy: The second issue was on the defalcation area there for travellers, which I think is important also, but a lot of other industries--like your banking industry with CDIC, your credit unions, your lawyers, and your life insurance industry--all have similar schemes that are self-administered and self-funded. Would that not be an issue? I would think that would be an issue. It's a major issue when it happens, but it doesn't happen that often. I see that being an issue the industry really should look after itself. Do you agree?

Mr. Martin Taller: Well, we actually are looking at a program of self-management for Canada because of the deregulated environment we operate in across Canada other than in Ontario, B.C., and Quebec. However, before that can happen, we also have to have some concern or consideration for the customer who's buying air travel that may or may not occur because of an airline being in CCAA. So the issue is how we can best implement a strategy on a national basis to protect consumers. This is an area we're looking at. We believe there should be a task force and a committee struck to look at this across Canada to protect consumers from air carriers that are using today's revenues to pay for fuel for tomorrow.

The Chair: Thank you very much.

On behalf of all the committee's members, we appreciate your time and the efforts you have put into your briefs as well, and thank you for getting them to us by our deadline so we could get them translated and distributed to all the members of the committee. Thank you very much.

We are going to adjourn this meeting, and colleagues, we are going to start the next meeting momentarily. We are adjourned.

» (1709)

» (1712)

The Chair: Order, everyone. The meeting is called to order.

The order of the day, pursuant to Standing Order 108.(2), is on the subject matter of Bill C-48, an act to amend the Income Tax Act, natural resources.

Appearing is the parliamentary secretary to the Minister of Finance, Mr. Wilfert. With him you have some officials from the Department of Finance. I understand Mr. Lalonde will join us shortly; also James Greene, tax policy officer, tax legislation division, tax policy branch; and Louise Levonian, director of the business income tax division of the tax policy branch.

Go ahead. The floor is yours, Mr. Wilfert.

One moment. Yes, Ms. Wasylycia-Leis

Ms. Judy Wasylycia-Leis: I might have missed something, but my understanding is that Bill C-48 is still in the House. We'll be voting on it shortly.

The Chair: We're not studying the bill; we're studying the subject matter of the bill under the--

Ms. Judy Wasylycia-Leis: Is that normal? Is there a procedural process for doing that? What is it?

The Chair: Yes, it's procedurally correct. I would not be here if it wasn't.

Mr. Bryon Wilfert: It's under Standing Order 108, which allows.... And many committees do that. So it's all in order.

The Chair: For tomorrow the notice has gone out under the same standing order to do a subject matter...but if the bill passes, the notice will be amended to do the bill itself. You can pre-study a bill on the subject matter. This is what we agreed to at the first part of the meeting here, by all of the committee members present. I think at that time you weren't in the room, so that's probably why....

Mr. Wilfert, go ahead.

Mr. Bryon Wilfert: Thank you, Madam Chairman.

I welcome the opportunity to appear before your committee today to discuss Bill C-48. In spite of my doctor's orders, I'm here, and I will try to get through all this.

What I'm attempting to do, Madam Chairman, is respond to the issues that were raised in the House during second reading, and hopefully I will address any issues or concerns that were raised at that time.

Bill C-48 implements federal income tax changes that were announced in the 2003 budget for Canada's resource sector. The resource sector comprises the mining, oil and gas, and fertilizer industries and is a significant component of the Canadian economy. It employs over 170,000 Canadians as an important generator of investment and exports. In 2001, for example, the sector accounted for almost 4% of Canada's GDP, with over $64 billion in exports and more than $30 billion in capital expenditures. As well, the potential for future resource development exists in virtually every region of the country. Internationally, Canadian resource industries are large investors in innovative technology and major participants in the provision of exploration and extraction services.

The reduction of the general corporate income tax rate from 28% to 21% that was legislated in the five-year tax reduction plan applied to most sectors, including services. It did not apply to resource income, since the resource sector benefits from a number of sector-specific tax measures. These include provisions relating to the deductibility of exploration and development expenses and the resource allowance, which is a proxy for royalties and mining taxes paid to provinces. There are also two targeted income tax vehicles, the Atlantic investment tax credit, which supports resource development and other investment in Atlantic Canada, and flow-through shares, which support junior exploration firms. In addition, a temporary 15% mineral exploration tax credit, introduced in October 2000, moderates the impact of the global downturn in exploration activities on mining communities across Canada. For the past several years the government has consulted on options to extend the lower corporate income tax rate of 21% to resource income, while at the same time improving the tax structure.

The 2003 budget announced several measures that help to increase the competitiveness of the resource sector, and some were legislated in Bill C-28, the Budget Implementation Act 2003, which, as you know, received royal assent in June. Among other things, that bill eliminated the federal capital tax over five years and increased from $200,000 to $300,000 the amount of annual qualifying income eligible for the reduced 12% federal small business tax rate. As well, that bill extended the existing temporary 15% mineral exploration tax credit until December 31, 2004, and provided an additional year for issuing corporations to make expenditures related to these arrangements.

Today we are discussing a new structure for federal income taxation of the resource sector. The measure in Bill C-48 reflects the government's belief that the resource sector has the potential to generate greater investment and jobs. It also reflects the government's ongoing commitment to an efficient and competitive corporate income tax system. This new regime, to be phased in over five years, will ensure that the resource sector firms are subject to the same statutory rate of income tax as firms in other sectors, and they will be able to deduct actual costs of production, including provincial and other crown royalties and mining taxes, rather than having an arbitrary allowance.

If I might elaborate briefly, the first measure in Bill C-48 will reduce the federal statutory income tax rate on income earned from resource activities from 28% to 21% by 2007. This rate is important, because it is often the first place of information viewed by prospective investors. A uniform low statutory rate will send a positive signal to investors in Canada and internationally about Canada's relative competitiveness. A single rate will also reduce compliance and tax administration costs.

The second measure relates to crown royalties, mining taxes, and resource allowance. Resource allowance was introduced in 1976 primarily to protect the federal income tax base from what were then rapidly increasing provincial royalties and mining taxes, which have been deducted for federal tax purposes.

» (1715)

While the fixed 25% allowance puts a ceiling on deductions, it distorts economic signals. In some cases it may result in a bias against investment in more valuable resources, which are more likely to yield a higher royalty return. In other cases it provides a deduction greater than the actual royalties and mining taxes paid. Economic conditions have changed significantly, as we all know, since the 1970s, leaving the original policy rationale for the resource analysis less relevant. In today's economic environment there's greater pressure on producers to be efficient and on a host of jurisdictions to levy royalties at competitive rates.

The complexity of the resource allowance calculation has also resulted in substantial compliance costs for the industry and substantial administrative costs for government. Bill C-48 will eliminate the resource allowance and provide a deduction for the actual amounts of provincial and other crown royalties and mining taxes paid. Projects will now be treated in a more comparable fashion. These changes will result in a tax structure that imposes the same corporate tax rate on resource income as on other corporate income and one that allows deductions for actual costs, instead of an arbitrary allowance.

Another measure introduces a new 10% mineral exploration tax credit for corporations that incur qualifying exploration expenses before a mine reaches production in reasonable commercial quantities, not to be confused with the 15% temporary mineral exploration tax credit that Bill C-28 extended to the end of 2004. This new credit will be available only to corporations, and in addition, it is not refundable or transferable under a flow-through share agreement or through partnership or trust. The new credit will apply to both Canadian grassroots exploration and pre-production development expenditures for diamonds, base or precious metals, and industrial minerals that become base or precious metals through refining.

While improving the tax structure for the resource sector, Bill C-48 also has measures to promote renewable energy and energy conservation projects. Specifically, it improves the treatment of the Canadian renewable conservation expenses, the CRCE. Corporations will be able to renounce these expenses to flow-through share investors in a year where the CRCE will be incurred the following year. This measure will apply to qualifying renewable energy and energy conservation projects and will provide greater flexibility in the timing of investments financed using flow-through shares. The treatment of flow-through share investments in such projects will now parallel that of investments in non-renewable energy projects.

What does this mean for the industry? This package is the product of an extensive--and I underline extensive--consultation with all parts of the resource sector. Overall, the changes will be positive for both the mining industry and the oil and gas industry. The net impact of the proposal on a particular resource firm will, of course, depend on the mix of projects undertaken, the financing structure of the firm, the amount of capital tax paid, and the size of the accumulated tax pools carried forward from previous years. The 10% mineral exploration tax credit included in Bill C-48 is also important in this regard. Mining companies that are investing in Canada by actively exploring for or developing new mines will benefit from this credit.

There was some discussion at second reading about the impact of the proposed changes on the effective federal tax rates. In determining that impact, it is crucial to take into account all of the elements of this package, including the new mining exploration credit, as well as the elimination of the capital tax, which some analysts have ignored. Cumulatively, these measures will substantially reduce the effective tax rates for both the mining and the oil and gas industries. For oil and gas this reverses a current disadvantage relative to the United States, for mining it builds on an existing advantage, and in both cases the changes place the Canadian resource sector in a markedly improved position to attract capital for exploration and development.

There seems to be some confusion, Madam Chairman, among some members about the cost of the changes in this bill. Over the long term the impact of the new structure will depend on a number of factors, including commodity prices. The Department of Finance estimates that when the measures are fully phased in, as of 2007, the revenue cost to the federal government will be about $260 million per year.

» (1720)

In the debate at second reading some members made reference to earning adjustments reported by various oil and gas companies in quarterly reports released this summer. They indicated that the three oil and gas companies alone had reported some $250 million in gains as a result of the proposed tax changes. There may be a misunderstanding of what these earnings reports were about. Accounting standards require that companies report in their financial statement an estimate of taxes they may have to pay in the future because of differences in timing between deductions for tax purposes and deductions for accounting purposes. This estimate covers future taxes over many years.

I only have a few pages left.

» (1725)

The Chair: We've less than five minutes till the vote right now.

Mr. Bryon Wilfert: I will return and finish off.

The Chair: Before people leave, I've got Mr. Paquette and Mr. Cullen on the list for questioning. Is anybody else here wishing to question after the votes? I'm not seeing anything. I think we should suspend for the votes, and then return. There will be at least the three of us to continue hearing the testimony.

We'll break for votes, come back, finish, Mr. Wilfert, with your testimony, and have two rounds of questions.

» (1726)

¼ (1802)

The Chair: Okay, we'll continue now.

The bill has been officially referred, so tomorrow when the notice goes out it will be amended to do the study of the bill for the witnesses tomorrow night.

Go ahead, Mr. Wilfert, please.

Mr. Bryon Wilfert: Thank you very much, Madam Chairman.

Accounting standards require that companies report in their financial statements an estimate of taxes they may have to pay in the future due to differences in timing between deductions for tax purposes and deductions for accounting purposes. This estimate covers future taxes over many years. When, as happened this year, the government proposes a reduction in the tax rate, accounting rules require that companies reduce the value of this provision for future taxes. This results in a gain for accounting purposes for which an adjustment is made in the current year.

This gain does not reflect lower taxes paid over the current period. It reflects reduced taxes potentially payable over many years into the future and it is completely consistent with the government's estimate of the cost of these measures.

In fact, gains to reduce future taxes were reported by not only the oil and gas companies but also by many mining companies as well.

This is exactly what we would expect from proposing a change of this kind set out in this bill.

In terms of provincial taxes, Madam Chairman, at second reading there were also some concerns expressed about the effect of these measures on provincial taxes.

Let's be very clear. This is a federal tax change we are proposing here. Each province is responsible for its own income tax system and it must make its own decisions on how to proceed in the area of jurisdiction.

Three provinces have independent corporate tax systems, Quebec, Ontario, and Alberta. This proposal has no direct effect on them. The other provinces and territories generally rely on a federal tax base, though they have the flexibility to set their own tax rate and other feature-like credits. To the extent that provinces rely on the federal tax base and these provinces do not make any offsetting adjustment, provincial income tax revenue from the resource sector may increase as a result of the new federal tax structure.

This would be the case, for example, for firms that pay royalties that are less than the resource allowance. We can expect through this that provincial and territorial governments would take action, where necessary, to appropriately adjust their corporate tax regimes to offset any such effect. They could, for example, reduce rates or introduce a credit as we have done. We respect provincial jurisdiction. However, it's up to each province to decide if and how this would be done.

The international competitiveness of Canadian firms will be maximized where provinces provide a mechanism to return back to the industry any revenue gain arising from the federal change.

In summary, Madam Chairman, let me say that the new tax structure for the resource sector will build upon the Canadian tax advantage to support investment, innovation, productivity, economic growth, and jobs for Canadians. The new structure will ensure that the Canadian resource sector is internationally competitive particularly in the North American context. It will also promote the efficient development of Canada's natural resource base by establishing a common corporate income tax for all sectors and by treating costs more consistently both across resource projects and between the resource sector and other sectors of the economy.

This new regime will simplify the taxation of resource income, streamline compliance and administration, and send clear signals to investors. In today's increasingly integrated global economy, improving the efficiency of the resource sector and the economy more generally are essential to maintaining Canada's economic prosperity. The measures in Bill C-48 will help to meet this challenge.

Madam Chairman, officials from the Department of Finance have joined me here today. We welcome any of your questions on Bill C-48.

Hopefully I have responded to a number of the issues that were raised by my colleagues during the second reading debate.

Thank you very much.

¼ (1805)

The Chair: Thank you very much.

Mr. Solberg, do I understand that you don't have any questions at this time?

Mr. Monte Solberg (Medicine Hat, Canadian Alliance): I'm going to Dave.

Do you have any?

The Chair: Mr. Chatters?

Mr. David Chatters (Athabasca, Canadian Alliance): No.

The Chair: Okay, then I'm going to allow Mr. Paquette up to ten minutes.

[Translation]

Mr. Pierre Paquette: Thank you, Madam Chair.

Thank you for your presentation and for being here. As you will see--maybe not you, but the parliamentary secretary--we voted against Bill C-48 because of the large number of uncertainties that it includes. But obviously, if we are able to improve the bill, we will not oppose it out of spite.

So I will be very clear. The issue for us is not the reduction of the tax rate from 28 to 21 percent to bring it to the same level as all other industries, it is rather the change from a resource allowance to full deduction of royalties. I am looking at your document which is very well written, by the way, and we used it a lot in our speeches a few days ago, not only myself but also my colleagues of the Bloc.

On page 18 of the French version of your document dated March 2003, you state:

In the case of the mining industry, the total amount claimed over the last ten years under the resource allowance was greater than provincial and other Crown royalties and mining taxes that were paid in practice.

So this means that industries which presently pay low royalties, either because competition between provinces or competition from other countries, will be faced with an increase in their effective tax rate. On the other hand, sectors which pay heavy royalties, like the oil and gas sector, will achieve a net benefit from this reform.

Therefore, my question is--you may want to take notes because I will put them all--whether you acknowledge in the context of this change to the taxation scheme of natural resources, with regard to this changeover from a 25 percent resource allowance to deductibility of royalties, that some sectors will end up paying more taxes, especially the mining sector?

Before you answer, I would add that in your very own document you state, on page 26:

To the extent that provinces rely on the federal tax base, and if these provinces do not make any offsetting adjustment, provincial income tax revenue from the resource sector may increase as a result of the new federal tax structure.

So this would add potentially a second tier of tax increases. True, the parliamentary secretary stated that this is under provincial jurisdiction but one of the criticism made specifically by the mining industry is that the time frame and complexity of Bill C-48 are such that there is no guarantee provinces will be able to adjust their rates, due to the fact that the federal reduction is phased in.

So this is my first question. Do you agree that under this change introduced by Bill C-48, there will be winners and losers, either on a temporary or a permanent basis?

[English]

Mr. Bryon Wilfert: We had, as I said, extensive consultation with all sectors, including the mining sector.

As I pointed out, the economic situation has changed since 1976. That's why we're dealing with the issue of royalties. We are in a much more competitive environment today than we were then. Obviously, there's the issue of producers having to be more efficient.

This is not, Madam Chair, a bill that is being imposed. This is a bill on which, after extensive consultation, we have come up with a number of changes that have received support.

With regard to the terms of the taxation with the provinces, the 10% is only for this year. Of course, provinces are free to do what they would like on their own.

The whole mining industry--and I'd like to emphasize this, Madam Chair, for the record--will benefit from the removal of the federal capital tax, which is of particular significance, I have to point out, to capital-intensive industry as such. Mr. Paquette's interpretation is obviously different from mine.

Maybe I could ask the staff of the department to comment specifically on an item if they'd like to.

¼ (1810)

The Chair: Ms. Levonian.

Ms. Louise Levonian (Director, Business Income Tax Division, Tax Policy Branch, Department of Finance): I guess what I would add is that our analysis indicates that both the oil and gas and the mining sectors will be better off under this proposal. When you take into consideration the capital tax, as well as the 10% credit that is also being implemented in this bill, both the mining and oil and gas sectors will be better off.

To respond to your question as to whether the provinces have sufficient time to actually implement changes they may wish to implement, the measures actually only come into force at 10% this year. So the removal of the resource allowance is only 10%, and the deductibility of mining taxes and royalties is only 10%. So it's a very small amount for the first year.

As well, I would just like to add that not only is it 10% for the removal of the resource allowance and the deductibility of royalties and mining taxes, but also that the credit will come in to help the mining industry. It's actually accelerated. The credit is 10%, but in the first year they can immediately get 5%.

[Translation]

Mr. Pierre Paquette: I think we do not understand each other and probably we will not be able to. But tomorrow, when the Mining Association of Canada will appear, their representatives might be able to better explain their objections.

According to your own document, the mining industry was better off with the resource allowance, instead of the deduction of royalties, than it will be after the changes. True, there will be the elimination of the capital tax that applies to all sectors, and a decrease of the rate from 28 to 21 percent; we are in agreement so far. Except that some businesses might have a higher effective rate than they do now for a period of time.

This is why I would like to know the parliamentary secretary's position. If tomorrow the Mining Association of Canada gives evidence that on a temporary or permanent basis there will be a loss resulting from the proposed changes, will the government be willing to consider the proposals the Association is putting forward in order to minimize the negative impact of this reform on the net income of these businesses?

[English]

Mr. Bryon Wilfert: Madam Chairman, I really can't respond to a hypothetical question, but I can tell the honourable member that in our consultations, mining companies that are investing in this country by actively exploring, for example, new mines will be positively affected by the new structure. They're going to get that new 10% we've talked about for the exploration tax.

But also, Mr. Paquette, this sector will continue to benefit. Let's be clear here: this sector is going to benefit from a number of other opportunities that other sectors do not have. Clearly, there is the accelerated capital tax allowance, the 100% write-off for pre-production development expenses—and other things are involved.

But, Mr. Paquette, we have consulted. You and I know that when we consult a wide range of participants, not everybody will necessarily be happy. But clearly, in the main, the very strong indications are that the sector is happy, both the oil and gas and the mining sectors. The provinces are going to benefit, the province of Quebec, the Atlantic region, Alberta, Saskatchewan, etc. So again, I think you have to look at the totality of what the bill is proposing and to look at that impact.

Obviously we want to be competitive in the international environment, and we are taking steps. In fact, I would assume you would be congratulating us for being proactive now in moving forward in this regard.

¼ (1815)

[Translation]

Mr. Pierre Paquette: I cannot congratulate you at this time because I have the feeling that the mining sector, and especially in copper and gold, will come out a loser with the reform. This is also the opinion of the Mining Association of Canada and the Mining Association of Quebec. Indeed, the proposal made to the minister for Mines in 2003--I do not know if you have read it-- in order to compensate the negative parts of the reform, was to implement it in one stroke in 2007 and to establish a new exploration tax credit of 20 percent rather than 10 percent. This was just to compensate the anticipated adverse effects.

But the Association will appear tomorrow. I simply want to get assurance that the Department of Finance is open to solutions, because if there is a slippage and it is demonstrated that some industry sectors and regions will come out losers, nobody will end up winning, neither the government nor industry, in my opinion.

I have a last question. The 260 millions dollars of yearly losses...

[English]

Mr. Bryon Wilfert: Mr. Paquette, before you go on—

[Translation]

Mr. Pierre Paquette: I know you, you will keep on talking until my time is up.

[English]

Mr. Bryon Wilfert: Just to make it very clear to Mr. Paquette, currently the marginal effective tax rate in the industry is 10.4%. It will go down to 7.6%. Compare that with the state of Nevada, which of course is well known for mining, where the rate is 14.5%. I think we'd be hard pressed for someone to come in to say that this is not going to be advantageous.

The Chair: A short last question.

[Translation]

Mr. Pierre Paquette: It is a request, Madam Chair. There is an ongoing debate about the net effect of this reform. In your document you talk about a 260 million dollar loss of tax revenue. Already, in the yearly reports of oil companies, there is a mention of 250 million dollars tax savings, just for oil companies. These are not all the result of Bill C-48 but I read in a report from Esso Imperial Oil Limited, I believe, that a good chunk of the tax savings are a result of Bill C-48.

So I would like to have the study the Department of Finance made to come up with its figure of 260 million dollars and find out if there have been impact studies for different resource sectors because intuitively I have the feeling that there are winners and losers. I want to know who wins and who loses. If everybody wins, fine. But I am also afraid that this will cost more to the public Treasury than 260 million dollars. So I wonder if we could have access to these studies on which you base this estimate of 260 million dollars that we find on page 26 of your document of March 2003.

[English]

Mr. Bryon Wilfert: Madam Chairman, in my remarks to the committee I made it very clear that by 2007, when the revenue costs to the federal government will take effect, it will be about $260 million a year in total.

I tried to respond, Mr. Paquette. In the second reading in the House, some members made reference to this adjustment issue. We talked about the $250 million...the reporting that we heard. But this is an accounting issue that you cannot compare. Essentially, as I indicated, the accounting standards companies use to report their financial statements estimate the taxes the companies may have to pay in the future. These estimates cover future taxes over many, many years. We have to be careful here that we're not trying to compare apples to apples.

Essentially, I responded to that. It's unusual, and you and I may disagree from time to time, but I did at least try to explain that to you. I appreciated the question.

[Translation]

Mr. Pierre Paquette: I would like to know whether we could have a copy of the impact study which was conducted by the department on the net effect this reform would have on Canada’s public finances.

[English]

The Chair: Ms. Levonian.

Ms. Louise Levonian: I can tell you that the analysis that was done indicates that even separately the mining industry benefits from this measure. It's possible that there could be one or two companies out there who are no longer actively exploring, and who may pay taxes earlier in their cycle. Our analysis all indicates that the majority of companies, even mining companies, are going to be better off under this.

To address another point I believe you made in saying that provincial taxes are one element of this, it's really important in taking this into account to understand that the provinces can change their rates. The competitiveness of Canadian firms is really going to be maximized if the provinces take action to adjust their rates in response to the base.

But overall, all of our analysis shows that mining companies on the whole are going to be better off. There will be very few who won't be better off; those are the ones who are no longer exploring and won't have access to this credit. It's not even a matter of will they pay taxes, but it's almost a matter of will they pay taxes earlier than they would otherwise? Again, this is an estimation in the future.

¼ (1820)

The Chair: Thank you very much.

[Translation]

Mr. Pierre Paquette: Could we have access to the studies that led to the figure of 260 million dollars per year once the reform is fully implemented? Could we see those studies?

[English]

Ms. Louise Levonian: Are you specifically asking for the actual numbers broken down by the oil and gas and mining sectors?

[Translation]

Mr. Pierre Paquette: I would like the study or studies which led you to write in a public document in 2003 that the reform would cost the government a total of 260 million dollars a year. Unless you drew the figure out of a hat.

[English]

Mr. Bryon Wilfert: Madam Chairman, maybe the department will have a different answer, but my answer would be that they're confidential documents. Because of the nature of the information given, I certainly don't believe we'd be in a position to release them.

Ms. Louise Levonian: The aggregate numbers are all public. But specific companies would have made representations. Those are—

Mr. Pierre Paquette: Not specific companies.

[Translation]

I just want to know how you came up with the figure of 260 million dollars. There must be a study that explains the methodology. Just show me the methodology so I can see if it sounds reasonable.

[English]

Mr. Bryon Wilfert: Do you want the methodology? We can give it to you.

The Chair: Perhaps you can pursue that directly with Mr. Paquette, unless other members are interested.

Mr. Bryon Wilfert: That's fine, Madam Chair.

The Chair: We've gone way over Mr. Paquette's allotted ten minutes, so I'm going to allow the other questioners an extra three minutes to compensate for that.

So Mr. Cullen will start with 13 minutes.

Mr. Roy Cullen: Thank you, Madam Chair, and thank you, Mr. Wilfert, and the officials.

I just wanted to clarify something on the $260 million. Is that the cost of the proposals fully implemented over the five years, or is that an annualized cost once fully implemented?

Mr. Bryon Wilfert: It's the annual cost.

Mr. Roy Cullen: The annualized cost once fully implemented.

Mr. Bryon Wilfert: By 2007.

Mr. Roy Cullen: And that's for both the mining and oil and gas sectors.

And how much of that is mining and how much of it is oil and gas?

Ms. Louise Levonian: Right now, it's approximately 80% to 20%.

Mr. Roy Cullen: Eighty percent to the oil and gas sector, and twenty percent to the mining.

Ms. Louise Levonian: But what's really important to note there is that the oil and gas sector pays approximately $6 billion in tax revenues, and the mining sector pays approximately $850 million, so they're actually proportional to the bases they pay.

Mr. Roy Cullen: So the percentage is in proportion to the federal revenues.... So does the $260 million cut roughly proportionately to the total federal revenues they bring in?

Ms. Louise Levonian: As a matter of fact, it's slightly better on the mining side—in total.

Mr. Roy Cullen: It's a tad better maybe. Okay.

I think we need to go back to the origins of this exercise. You can correct me if I'm wrong.

In budget 2000, the government reduced the statutory rate from 28% to 21%, excluding the resource sector, because of a number of tax incentives and tax allowances that existed in that sector. Then you put out a discussion paper, and on the basis of some discussion, hopefully, you've come forward with these recommendations.

I think that going from 28% to 21% is something that the oil and gas and mining industries wanted because it makes it much more competitive and clear. Instead of saying 28%, plus accelerated this and investment tax credit that, you can advertise it as a statutory rate of 21%. In doing that, the department and the government really wanted to get rid of the resource allowance because of its complexity and a number of other factors.

It seems to me that one of the things then to compensate for the fact that, especially in the mining sector, eliminating the resource allowance would actually put some of them at a disadvantage, the government is proposing this investment tax credit on exploration of 10%. Accompanying that was a general tax measure of phasing out the capital tax, which will benefit the oil and gas and mining industries significantly, because it's quite capital-intensive.

My difficulty is that my impression was that, at the very best, it should be revenue neutral and maybe revenue positive in terms of the sectors involved. Of course, you have to look at the mining sector as a conglomerate of different types of companies in the full spectrum. Even though, on balance, if you look on average, the mining industry is probably going to be somewhat better off, there are parts of the mining industry that are going to be negatively impacted, or they're certainly not going to see any benefit.

Potash is a sector that's going to benefit well, as will the junior mines, where they're doing a lot of exploration. The base metals, part of the precious metal sector, with companies like Inco and Falconbridge, which employ a lot of people and create a lot of economic activity, are not going to see the kind of benefit that the others might. I have a concern about that. While understanding and appreciating that you can never have everyone come out even, I think there's a sector that's not going to see much benefit from these measures.

The other issue that I want to raise is this potential windfall for provinces. If we look at the province of Ontario, for example, where we're probably going to have a new Liberal government, Dalton McGuinty has said that he's not going to reduce any taxes. What are the chances then in the province of Ontario that, with this windfall gain, they will actually move in to reduce taxes on the mining sector, given the position of the leader of the Liberal Party?

I think you could also raise the same question with respect to other jurisdictions. What confidence do we have that they're going to take the windfall and reduce the tax burden on the mining sector?

I have a question. I think Mr. Paquette raised it. I'd like to put the question to the officials and to the parliamentary secretary.

If we increase the investment tax credit on exploration from 10% to 20%, I am told that, for the base metals and some of the precious metal sectors, this would make it more interesting and would compensate for the fact that they're going to be the major—I don't know if you'd call it “the major losers”—sector that's not going to get any lift and will be negatively impacted by some of these measures.

What would be the implications of moving the investment tax credit to 20%, phasing it in over the same period? What can the federal government do to ensure the provinces respond to this windfall appropriately and reduce the burden on the mining industries in their provinces?

¼ (1825)

Mr. Bryon Wilfert: Madam Chair, first of all, I reject categorically the characterization the member has made.

I'm a bit surprised, Mr. Cullen. The fact is that the estimated effect of tax rates on mining in Canada will be further reduced and will continue to be lower than in competing U.S jurisdictions.

I would also point out to you that in your proposal--and I assume you have your cheque book ready--it will cost $100 million over five years and $35 million every year after that. That, I will tell you, is not on the table. We wouldn't be able to support that.

As far as provincial jurisdictions are concerned, let's go back, if I might, very quickly. Why are we doing this? I know you're a big supporter of this, Mr. Cullen. You want to improve the international competitiveness of Canada in the resource sector. I know you're very strong on that. I also know you'd like to see the taxation of resource income simplified, and we're doing that. I'm sure you would like to promote a more efficient development of our natural resources in this country. I'm assuming you support that. This is what this bill tries to address.

I cannot comment, because of confidentiality, on the specific companies you raised, but the reason we had such support across the industry is that people are going to benefit, particularly those engaged in the new mining exploration, obviously.

As far as the province is concerned, we respect provincial jurisdiction. I indicated, though, that we would expect provincial governments to take action, if it was appropriate, in adjusting their corporate tax regimes. Maybe that's a question you can ask Mr. McGuinty if he becomes the premier of the province of Ontario, but I can say to you that we have respected provincial jurisdiction; we recognize what can be done in offset. I do believe what is being proposed here will make this country far more competitive than it has been in this area, and we're going to be able to invite the kinds of dollars for needed exploration and job opportunities that up till now, unfortunately, we've been lagging in.

Again, we're trying to respond effectively to the consultations. I think it would be unfair--and I won't say you said this--to say we had some consultation. We undertook consultations all across the country with the resource sector.

¼ (1830)

Mr. Roy Cullen: I'm surprised, Mr. Wilfert, that you're surprised, because what I was talking about was the different impact on different sectors within the mining sector itself. I'm talking about the base metals and parts of the precious metals sectors. I think we'll hear categorically tomorrow night that these sectors are not going to benefit from these tax measures. In fact, they might be negatively affected.

But following your logic, in respect of investment in Canada and exploration in Canada, which is something we want to do, there would be a certain logic to increasing the credit from 10% to 20% and getting even more exploration in Canada by some of the major companies.

Mr. Bryon Wilfert: If I follow your logic, $100 million maxed out over five years and $35 million on top of that, this is one element we cannot support. We have other areas, as you know, in regard to benefit for the mining sector. What you're doing, with all due respect, is taking one item; you're not looking at some of the other items where the mining sector is also benefiting as other sectors do not. Should we then say we shouldn't be assisting them in other areas where maybe other sectors are disadvantaged? If particular sectors, in your view, are being disenfranchised or unfairly dealt with, you may or may not hear that tomorrow, but from the overall discussions and presentations the department had, that isn't borne out.

Mr. Roy Cullen: Of course, I could be equally cynical and talk about divide and conquer, but I won't do that, because I know the officials have tried to work up something that is as palatable as it can be and as attractive as it can be.

I'd like to put a question to Ms. Levonian. Maybe you could comment on the impact on the base metals and the precious metals groups. Would there be any support within the department to move from a 10% to a 20% credit for exploration? What would the economic stimulus in Canada be if we went along that particular path? Would you see a lot more exploration by the base metal and precious metal industry in Canada?

Ms. Louise Levonian: Again, we did consult far and wide on this measure. Our analysis and discussions with specific companies have led us to believe that those particular sectors will not be worse off. They will be neutral to better off. There are very few companies that may pay taxes early on. I think the companies' perspective is that they wouldn't take into account the capital tax removal, and they will be focusing on the provincial increases, which are up to the provinces.

As I said, the competitiveness of Canadian firms will be maximized if they take action. We'll be watching that. So at the end of the day, all our consultations and analysis have led us to believe that there are very few companies that are not going to be neutral, if not better off, under this proposal. The companies may come and say that they're going to have to pay higher provincial taxes, but when you take into account all the measures, including the credit and the removal of the capital tax, we believe they'll be better off.

¼ (1835)

The Chair: Thank you.

Go ahead, Mr. Stoffer.

Mr. Peter Stoffer (Sackville—Musquodoboit Valley—Eastern Shore, NDP): Thank you, Madam Chair.

I want to thank the two researchers. They prepared eight questions. It would take a long time to answer them all, so I was wondering if I could leave them with you, along with my name and number, and when you get a chance, perhaps you could send me a note on those--not yourself, but the department. They're very good questions, but I don't have enough time to deal with them all. I don't want to keep you here until midnight answering them.

The Chair: I'm at your disposal.

Mr. Peter Stoffer: If you could, I'd appreciate it.

Mr. Bryon Wilfert: I'm sure they are excellent questions.

Mr. Peter Stoffer: I have a couple of simple questions. Mr. Wilfert, you said that there were extensive consultations with the sectors. Were aboriginal groups in the country consulted on this? The reason I ask that is because of future land claim developments and concerns of that nature.

Ms. Louise Levonian: We put out a paper on March 3 that basically set out where we would be heading, and we were open to consultations based on that. We consulted prior to putting out the paper. We announced in the budget that we would be going forward with this. We put out a very specific paper that then did that.

Mr. Peter Stoffer: The question was, were aboriginal groups specifically consulted on this?

Ms. Louise Levonian: Did we seek out aboriginal groups and talk to them?

Mr. Peter Stoffer: Yes.

Ms. Louise Levonian: No, but we put out the paper, and we're open to--

Mr. Peter Stoffer: I appreciate the paper, but Mr. Wilfert said that there were extensive consultations. There are a lot of land claims going on throughout the country right now, and aboriginal groups have an important role to play in the development of natural resources when it comes to their treaty discussions. By the time 2007 rolls around, especially in the far north and the northern parts of the provinces, I think they would want to have a say in what's going on. Were they consulted on this particular aspect?

Mr. Bryon Wilfert: Madam Chairman, again I emphasize very clearly that in all parts of the country the resource industry was consulted. The paper was available, and any interested party, whether they be aboriginal groups or whoever, had the opportunity to comment. Certainly the paper was out there. But in terms of the specific consultations on the impact of the taxation measures--and this is what we're dealing with--it was with the industry.

Mr. Peter Stoffer: So, for example, certain environmental groups had the same type of consultation, such as the Sierra Club, Greenpeace, and the B.C. Wilderness Society, those types of groups.

Ms. Louise Levonian: They did not come forward. It was out there, so anybody could have provided their perspective on it.

Mr. Peter Stoffer: How many mining companies in Canada are foreign controlled or foreign owned?

Ms. Louise Levonian: Sorry, I don't have that information.

Mr. Peter Stoffer: I come from Nova Scotia, and one of the biggest complaints we have there is that we've given our natural gas away. We don't burn one drop of it. It all gets burned in the United States. We get very little in terms of royalties. A lot of that is because of previous provincial negotiations, not necessarily the federal government.

But I've also been in consultation with people on the prairies and up north, and it appears to the average Canadian that we're just giving our natural resources away. We're not getting value for our dollar. We're not getting the maximized return on that. That's why I asked the question. I suspect that a lot of these companies are foreign controlled or foreign owned. So they're having access to our natural resources, and we are giving them the benefit of tax breaks.

In terms of competitiveness, you mentioned, Mr. Wilfert, the United States twice. Was a comparative study done in terms of what Australia, New Zealand, Asia, and Europe charge their companies? Are we competitive with them now? Or did we just do this comparative study with the U.S.?

Mr. Bryon Wilfert: In answer to the first part of the question, as far as foreign companies are concerned, I appreciate your comments very much, but I would point out to you that one of the offsets clearly is that a lot of jobs are created by these companies that come here, certainly oil companies off the shore of Nova Scotia and others. You may want to talk to your provincial colleagues, but the fact is, we wanted to be competitive, not only with the United States--and I want to make this very clear--but internationally, particularly, and I gave the example of Nevada, in the North American context, obviously, because of its proximity. And for some major mining firms, if they're going to locate within the North American market, we want to make sure that if they're going to do business, they're going to come here.

In the broader context, we looked at other jurisdictions. I don't have that information per se. Is it one of your eight questions you'd like me to respond to?

¼ (1840)

Mr. Peter Stoffer: Not there, but they have them now. But there are a couple of other things.

I guess one of the ironic things about all of this is that we just had quite a debate in the House of Commons regarding Kyoto and how we have to do more to clean up our air and our environment. At the same time, it appears to the average Canadian, which I think I am, that we're giving further tax breaks to the companies who, by nature of their business, produce the most pollution. So I wonder, has the overall Kyoto plan fit into this regime?

Mr. Bryon Wilfert: Mr. Stoffer raises an excellent point. I would point out that under this new structure, the resource taxation will mean clearly that firms in the non-renewable energy sector are going to be subject to the same statutory rate of corporate income tax as firms in other sectors.

But I'd also like to point out that with respect to Canada's Kyoto commitment, and it's a very important point that you raise, the oil sands industry, as an example, will be called upon to make a significant contribution to a 55-megaton emission reduction target through the large industrial emitters program.

Renewable energy initiatives figure prominently. As you know, Mr. Stoffer, in the government's Kyoto response, and obviously in the 2003 budget, we had $2 billion over five years, which supported development and commercial use of alternate energies, and so on.

I did allude to that in my opening remarks, but the fact is there's an excise exemption on ethanol content for blended gasoline. I know you're very supportive of that. It was extended to the ethanol-biodiesel area. There's an accelerated tax on depreciation as well, through CCA class 43.1, which was extended to certain stationary fuel cells and certain other renewable energy equipment as well. So in fact it's a good point, and we are addressing that as well, as part of this initiative.

Mr. Peter Stoffer: All right. Here is my last question.

For provinces like Nova Scotia, which find themselves in a fiscal vice grip right now, giving tax breaks to literally anyone is a serious challenge. What would you say to the province of Nova Scotia, obviously with a burgeoning oil and gas sector? How are they going to be able to match?

As Mr. Cullen had said earlier, the provinces might not be able to kick in with any kind of reduction, because they simply can't afford to right now. Politically, it would be a serious risk to them because of the fact that people--in fact, many Liberals like Danny Graham, the leader of the Liberal Party--say there should be no further tax breaks for anyone until we get our fiscal house in order. How do you tell them or those provinces that are in that vice grip? How are they going to be able to pass on any savings after this is indeed followed through?

Mr. Bryon Wilfert: This bill is designed to prevent windfall situations. As I indicated, outside of Quebec, Ontario, and Alberta, where it doesn't have any effect on them, the other provinces generally rely on the federal tax base. Obviously, if they want to make an offsetting adjustment, that would be up to them, but this is to prevent any windfall issues.

The Chair: Thank you.

Do you have another question, Mr. Stoffer?

Mr. Peter Stoffer: I'd send him the eight questions, but I do have to leave. I thank you very much for the opportunity.

The Chair: No problem.

Mr. Bryon Wilfert: We have Mr. Stoffer's questions, and we'll certainly endeavour to get the answers back to him.

Mr. Peter Stoffer: That would be great. Thank you.

The Chair: Thank you.

Now I'll go to Mr. Chatters.

Mr. David Chatters: Thank you, Madam Chairman.

The Chair: You have up to 13 minutes, if you'd like.

Mr. David Chatters: I have just a short question.

In this transition from the resource depletion allowance to full deductibility of royalties, does it affect in particular mining companies differently in one province from another? For example, compare a mining company in northern Quebec to a mining company in northern Ontario. Because the royalty structure is set by the province, is there a great variation in royalty amounts, therefore affecting the industry in one province more than in another?

¼ (1845)

Ms. Louise Levonian: I can answer that.

The schedule of implementation is obviously the same in every province; it's not different. It would depend on the province's individual royalty regime applied to the companies, what--

Mr. David Chatters: I'm asking you, is there a significant difference in royalties between provinces?

The Chair: Did you want to add something?

Mr. James Greene (Tax Policy Officer, Tax Legislation Division, Tax Policy Branch, Department of Finance): There are obviously differences. In terms of royalty rates, provinces are in a sense very mindful of what the others are doing as well as what other jurisdictions are doing, so there tends to be a lot of similarity in royalty rates for particular kinds of products.

Mr. David Chatters: But you would grant that if a province has a lower royalty regime on the same mining industry, then this move is going to hurt the industry in that province more than the industry in another province that has had a higher royalty regime.

Mr. James Greene: All things being equal, that's true.

Mr. David Chatters: That's all I needed.

The Chair: Ms. Yelich, go ahead.

Mrs. Lynne Yelich (Blackstrap, Canadian Alliance): I just have one question, because I'm new here. It's a simple question.

I have three potash mines in my riding. I want to know what I can tell them that's positive about this bill.

Mr. Bryon Wilfert: In fact, Madam Chair, it's a good question. The answer is that they're going to do very well.

Mrs. Lynne Yelich: Can you expand on this so I can make them feel really good?

Mr. Bryon Wilfert: They pay high royalties at the moment, and under this regime they will in fact--and we know they will--be pleased.

Mrs. Lynne Yelich: Excellent.

Just for my ethanol people too--I only have one ethanol plant in my riding--is there anything I can tell them? I heard you mention ethanol, but I hadn't realized that it would also benefit. I would also like to hear, is there...?

Mr. Bryon Wilfert: I did that, Madam Chair, in the context of the budget, not in the context of this bill.

Mrs. Lynne Yelich: Thank you.

Mr. Bryon Wilfert: Thank you, Madam Chair.

The Chair: Thank you, colleagues, for returning. We will have more on this bill with our witness panel tomorrow evening.

For the information of colleagues, I will make sure there's some food here so you don't fade away as you work.

We are adjourned until tomorrow.