FINA Committee Meeting
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STANDING COMMITTEE ON FINANCE
COMITÉ PERMANENT DES FINANCES
[Recorded by Electronic Apparatus]
Thursday, May 11, 2000
The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call this meeting to order and welcome everyone here this morning.
The order of the day for the finance committee is Bill C-24, an act to amend the Excise Tax Act, a related act, the Bankruptcy and Insolvency Act, the Budget Implementation Act, 1997, the Budget Implementation Act, 1998, the Budget Implementation Act, 1999, the Canada Pension Plan, the Companies' Creditors Arrangement Act, the Cultural Property Export and Import Act, the Customs Act, the Customs Tariff, the Employment Insurance Act, the Excise Act, the Income Tax Act, the Tax Court of Canada Act, and the Unemployment Insurance Act.
Before Mr. Cullen delivers his introductory remarks, I want to take the time to read the names of the officials who are present here, or at least the names I've been given. Before we even start, I want to thank them for their excellent work as always.
From the Department of Finance, we have: Marlene Légaré, senior chief, tax policy branch, sales tax division; Brian Willis, senior chief, sales tax division, tax policy branch; Rainer Nowak, chief, tax policy branch, sales tax division; Melanie Chin, tax policy officer, tax policy branch, sales tax division; Lalith Kottachchi, senior tax policy officer, tax policy branch, sales tax division; Dean Beyea, tariffs officer, international trade and finance branch; Gérard Lalonde, chief of business and property income, tax legislation division, tax policy branch; Robert Wong, legislative counsel, tax counsel division; and Ken Medd, senior tax policy officer, first nations taxation section, intergovernmental tax policy division, tax policy branch.
From Canada Customs and Revenue Agency, we have Jean-Marc Raymond, senior general counsel, and James MacDonald, programs officer.
If there is anyone else present whose name I don't have, kindly forward it to me, because of course I also want to include your name in the record of this committee.
Mr. Cullen, welcome. As you know, you have five to ten minutes to make your introductory remarks. Thereafter we'll engage in a question and answer session.
Mr. Roy Cullen (Parliamentary Secretary to the Minister of Finance): Thank you very much, Mr. Chairman. I'm pleased to have the support of the Department of Finance and the CCRA in this fairly technical area of tax policy and tax law.
With me is Marlene Légaré and Brian Willis. They will help direct traffic to other officials if and when we need it.
I'm pleased to have this opportunity to outline the measures contained in this bill and to respond to your questions.
The operation of our federal tax system affects virtually every Canadian and every family, each company and organization. It impacts our standard of living as individuals and our ability to compete and grow as a nation.
From the start of our first mandate, this government has been active in ensuring that we provide a tax system that is fair; a system that eliminates unnecessary loopholes and confusion; and a system that provides targeted assistance to sectors and groups - such as charities and persons with disabilities - that deserve our assistance.
These are the goals and opportunities underlying the legislation we have brought before you: to make our tax system simpler and fairer, not only for individual Canadians but for Canadian businesses as well.
The honourable members will recall that when the harmonized sales tax, or HST, was implemented in 1997 with three Atlantic provinces—Nova Scotia, New Brunswick, and Newfoundland and Labrador—it was a successful example of federal-provincial cooperation. It also presented creative solutions to some of the challenges we as Canadians will face together as we head into a new century. This bill builds on the spirit of that initiative.
While this bill is primarily aimed at improving the operation of the goods and services tax, or GST, and the harmonized sales tax, it also contains other important proposals relating to specific taxes on certain products.
For example, Bill C-24 contains measures with respect to the taxation of tobacco products.
Mr. Chairman, I trust that honourable members are aware of the government's commitment to reducing smoking rates, particularly among younger Canadians.
One of the concrete planks in this commitment has been the National Action Plan to Combat Smuggling, which we launched in 1994.
This plan has had a significant impact on contraband, so that we have been able to increase taxes on tobacco products in 1995, 1996, and 1998, in cooperation with participating provinces: Ontario, Quebec, New Brunswick, Nova Scotia, and Prince Edward Island. We have monitored each of these increases closely to ensure that they do not result in renewed smuggling activity.
The proposals contained in this bill relating to the taxation of tobacco products reaffirm the government's commitment, in cooperation with the provinces, to reduce tobacco consumption in Canada while maintaining vigilance in combatting the level of contraband.
An important component of Bill C-24 reflects the government's responsiveness to the health and social needs of Canadians.
For example, this government recognizes that many Canadians are providing care for family members, very often an elderly parent or a disabled child.
Bill C-24 proposes to provide a sales tax exemption for respite care. This proposal will enhance federal support for those Canadians who are striving to meet the growing demands of caring for family members with an infirmity or disability.
With respect to individuals with disabilities, I trust honourable members would agree that these Canadians face many challenges. In past budgets, the government has introduced numerous measures to assist these individuals. This bill builds on such actions and the significant level of tax assistance that is already available.
The proposals contained in Bill C-24 extend sales tax relief to the purchase of specially equipped motor vehicles for transporting individuals with disabilities. The proposed sales tax rebate will ensure that all individuals and organizations get tax relief on the additional cost of purchasing vehicles that meet their special needs.
Other measures in the area of health care contained in this bill include the continuation of the goods and services tax and harmonized sales tax exemption for speech therapy services.
Under the GST and the HST, the list of exempt health care providers is limited to those regulated as a health care profession in at least five provinces. The proposals contained in this Bill will allow the speech therapy profession more time to meet the eligibility requirements for the provision of tax-exempt services.
In addition, Bill C-24 corrects an inequity with respect to providers of psychological services by ensuring that the sales tax does not discriminate against duly qualified psychologists.
As I mentioned in my introduction, the government is committed to a fairer tax system for Canadians. Bill C-24 reflects that commitment in a number of areas.
In recognizing the important role played by charitable organizations in helping Canadians and enriching our communities, this bill addresses the special circumstances faced by designated charities whose main purposes include the provision of care, employment, employment training, or employment placement services for individuals with disabilities. Specifically, this bill provides these charities the capacity to compete on an equal footing when selling goods or services to GST-registered businesses. Bill C-24 also refines the rules for the streamlined accounting method for charities.
Mr. Chairman, a number of amendments contained in Bill C-24 are aimed at clarifying and refining the application of our sales tax system. For example, this Bill contains amendments aimed at clarifying the sales tax treatment of transactions between natural resource producers and exploration companies. Amendments such as these will ensure consistency and fairness in the application of the goods and services tax and harmonized sales tax in a number of key areas.
I would like to take a moment, Mr. Chairman, to point out that the amendments in this proposed legislation were developed in response to representations from the tax and business communities and from interested Canadians. As I mentioned earlier, this reflects the government's ongoing commitment to making the tax system fairer, more efficient, and easier for businesses to comply with.
As a result of the collaborative process between the federal government and businesses in the energy sector, this bill proposes a number of changes that streamline the operation of the goods and services tax and the harmonized sales tax in that sector. These changes will help to ensure that Canadian businesses remain competitive in the international marketplace.
I would like to take this opportunity, Mr. Chairman, to mention that the federal government is well aware of the importance of the travel and tourism industry to Canada's economy. The government has helped to promote Canada as a tourist destination and to support the tourism industry in the creation of employment. Consultations with the tourism industry indicated that the visitors' rebate program is generally viewed as an important tool in promoting tourism, particularly the accommodation and convention measures.
Mr. Chairman, Bill C-24 proposes a number of enhancements to the design and delivery of the Visitors' Rebate Program to further promote Canada as a destination for tourists and a place to hold conventions - for example, by reducing GST and HST costs associated with providing conventions to non-residents.
I would emphasize, Mr. Chairman, that the federal government will continue to consult with the business community to improve the operation of our sales tax system. In that regard, Bill C-24 contains a number of proposals to improve the rules relating to certain business arrangements and ensures that the legislation accords with the policy intent.
In response to industry concerns, this bill also proposes an important measure that will correct an inequity with respect to multi-employer pension plans. The bill proposes that a rebate be provided to trusts governed by such pension plans, which will place them on a comparable footing with single-employer pension plans with respect to the sales tax they bear.
Mr. Chairman, this government also continues to work towards improving the administration and enforcement of our sales tax system. Bill C-24 amends several provisions in these areas to update them relative to current administrative practices.
Moreover, the Bill proposes to achieve greater harmonization of certain administrative and enforcement provisions in the various tax and duty statutes.
It also contains proposals to improve the efficiency and effectiveness of the assessment, appeals and collections provisions overall.
I mentioned earlier, Mr. Chairman, that Bill C-24 contains measures relating to other specific levies on certain products. In accordance with the 1997 decision of the World Trade Organization, this bill contains the amendment that repeals the provisions relating to the excise tax on split-run editions of periodicals.
With respect to Canadian tariffs, the bill implements proposals to increase certain duty and tax exemptions for persons returning to Canada after a minimum period abroad. These proposals will make it more convenient for travellers to clear Canadian customs. This is just another example of the steps we have taken to improve service for visitors and Canadians returning to Canada.
Mr. Chairman, this government remains committed to enhancing aboriginal self-government and has often reiterated its willingness to put into effect taxation arrangements with first nations interested in exercising tax powers. This bill proposes technical amendments to the Budget Implementation Acts of 1997, 1998, and 1999 to enhance the harmonization of first nations sales taxes with the GST and to ensure that the definitions contained in these acts are consistent with definitions used in other federal statutes.
In closing, the measures contained in Bill C-24 that I have outlined here today propose to refine, streamline and clarify the application of our tax system.
At the same time, Mr. Chairman, this Bill responds to social issues that are important to Canadians.
Together with the officials here today, I will now be pleased to answer any questions you may have. Thank you. Merci.
The Chair: Thank you, Mr. Cullen.
Is anybody ready for questions? Mr. Forseth?
Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Canadian Alliance): Thank you.
Perhaps we could get some further expansion on the non-residence and cross-border transactions issue. The benefits to Canadians were mentioned, but what about the benefits to Americans? We want to encourage Americans to come over and buy Canadian.
A few years ago a Swedish resident came to Canada to spend a holiday. They dutifully filled out their forms for being able to get a GST rebate or whatever. Months later they got a cheque, but the cost of them clearing the cheque was more than what the cheque was worth so they sent the cheque back to us and said “Maybe you can use it.” So there was an example where the GST exemption really wasn't working for the tourist.
The Chair: How do you encourage that?
Mr. Paul Forseth: By expanding on exactly what is being done here to make Canada more friendly for tourists to come and buy Canadian.
Mr. Roy Cullen: Maybe I'll just lead off, and then we'll go to the officials.
One answer would be to get tourists to spend more so that they'll get more rebate. It's hard to rebate more than they've paid on GST. If there are a number of minor purchases, I expect the GST rebate will be relatively minor as well. I'm not trying to be facetious.
One of the focuses is on the convention business as well. We've made a number of enhancements over a number of years to make sure we attract convention business and make that as attractive as we can to individuals coming from outside of Canada.
Ms. Légaré or Mr. Willis, would like you like to expand?
Ms. Marlene Légaré (Senior Chief, Tax Policy Branch, Sales Tax Division, Department of Finance): Sure. I'll just give a little more detail on the specific measures contained in Bill C-24 that relate to the visitor rebate program. Then I'll come back to the issue of the timeliness and ease with which visitors can obtain their rebates.
This particular bill extended the existing short-term accommodation rebate, which was already available for tax paid by non-residents on hotel and motel accommodation and the like, to include the tax paid on campsites and the campsite rental fees and hookup fees. In the area of conventions, as Mr. Cullen mentioned, it extended the amount of relief that non-resident organizers of conventions held in Canada can obtain with respect to the tax they pay on meals and entertainment expenses. Those were the two areas that were focused on in terms of enhancement to the visitor rebate program within the bill.
I think the concern that has been expressed is probably more in relation to the administrative ease with which the rebate is obtained. One of the things that has been a facet of the program from the beginning is that perhaps some tourists aren't as familiar with the possibilities of obtaining the rebate in this manner. There is the possibility of duty-free shops. For example, the rebate covers goods that are purchased in Canada. You can get the tax back for it. That can be obtained directly at cooperating duty-free shops in Canada as well, where they could get the cash rebate before they leave the country.
Apart from that, all we can do is try to make as much information as possible available to tourists so that they have access to the application forms and the knowledge that the rebate exists. We're certainly attempting to do that. CCRA is responsible for assisting in those efforts.
Mr. Paul Forseth: I'm thinking again about the ease of delivery. We know there's a fair market of German tourists who will come to British Columbia and rent a travel van unit and travel extensively throughout Canada. Then they'll return their travel unit to the lot or whatever and fly back to Germany. To get all of their rebates they have to fill out all kinds of complicated forms. They may get the cheque six months later in Germany. Then they try to clear it.
There should be some way upon exiting the country where they simply submit a form and get the money as they go on the airplane. I would think there could be perhaps some contractual arrangement with a duty-free store, which is already in that business, whereby they could accommodate these other people. That then becomes part of the selling package to bring more foreign tourist dollars to the country.
Ms. Marlene Légaré: As I mentioned, that type of arrangement is certainly in place with regard to goods that are purchased for export. They have available, therefore, at the duty-free shop the evidence to show that these goods are going outside of the country.
We do have to protect the integrity of the program and to ensure that the tax that is being refunded is in fact being refunded to non-residents, and in the case of goods, that the goods are being taken out of the country and are not being consumed in Canada. I think that's one of the difficulties in the balances that have to be looked at when you're looking at designing a program. You have to look at the ease of administration, but you also have to protect against the possibility of inappropriate or fraudulent claims where they're not actually tourists or non-residents.
I think the ability of a duty-free shop to act as the administrator or enforcer in that context of ensuring the validity of a claim is somewhat constrained. They can, as I said, have some ability to enforce the criteria that goods are being exported because of the control at the border, but it would be more difficult for them to be in a position to verify claims with regard to things, as you mentioned, such as the rental of property while the tourist was in Canada.
That's what we have to balance, and I think we felt that we strike the correct balance in affording the opportunity to get the rebate immediately where we have arrangements with duty-free shops, but it's probably unavoidable that non-residents have to make application for some other expenses they incur, such as hotel accommodation in Canada.
The Chair: Mr. Marceau.
Mr. Richard Marceau (Charlesbourg, BQ): It's always a pleasure to welcome you here, Mr. Cullen. I'd also like to thank Finance Department officials for attending the meeting.
Mr. Cullen, there seems to be a common theme running through your presentation, namely that Bill C-24 is aimed at bringing in a so-called fairer tax system. You also talked about the harmonization of the GST with provincial sales taxes in Atlantic Canada as a model of cooperation for Canada for the 21st century. This was the only passionate part of your presentation, the rest of which was highly technical, given the highly technical nature of Bill C-24.
This is somewhat of a sticking point with me, given that the federal government awarded $961 million to the Atlantic provinces to harmonizes their taxes, whereas Quebec, which harmonized its tax system several years earlier, was not entitled to any compensation whatsoever. Quebec incurred substantial costs in reforming and harmonizing its tax system. It was forced to raise business taxes and maintain certain restrictions on tax rebates on business inputs. Therefore, Quebec businesses have yet to benefit from the harmonization of the GST and PST which was accomplished several years earlier, even before harmonization was implemented in the Atlantic provinces.
You claim that the 1996 agreement with the Atlantic provinces is a fine example of cooperation. I, on the other hand, see it as a case of giving to some, and not to others. I find the federal government's actions a little odd and hard to swallow. I'd appreciate your comments on this matter.
Mr. Roy Cullen: It's regrettable, Mr. Marceau, that the Government of Canada and the Government of Quebec were unable to resolve this problem.
This bill per se doesn't deal specifically with that.
The negotiations at the time fell apart. I'd have to go back to my other notes, but my recollection is that the amount Quebec was asking very much exceeded the number the Government of Canada thought was appropriate in the circumstances in terms of the transition or lost revenues. I think it's probably safe to say that the government felt they were somewhat overstated. So we weren't able to conclude an arrangement.
I think it's sad in a sense that we haven't been able to harmonize the tax right across Canada. I know that in my own province of Ontario, by harmonizing the tax with the Ontario government, we could reduce the combined tax by one percentage point just in terms of the administration costs, and then we could take it beyond that.
I think it's unfortunate that the Government of Canada and the Government of Quebec were not able to agree on the figure, if you like, that was proposed.
Mr. Richard Marceau: Speaking of this very matter, when requests of this nature are made, of course the starting positions at the negotiation table differ. Unfortunately, it appears that the Quebec and federal governments were unable to come to an agreement. An offer was made in 1997 to bring this matter before an impartial, independent arbitrator, one amenable to both parties, for a resolution.
You claim the Quebec government requested more than it was entitled to receive. The federal government awarded a total of $961 million to the Atlantic provinces, which represents approximately $423 per capita. The Quebec government was demanding $2 billion, or $273 per capita. When it calculated how much to award the Atlantic provinces for harmonization, the federal government failed to take into account the different tax structure in place in these provinces.
Would you be willing to lay your cards on the table, as far as numbers are concerned, and would you agree to the Quebec government doing likewise and asking a third party to rule on this dispute? Then we would see who is or is not exaggerating.
Mr. Roy Cullen: Maybe I could make a couple of comments. First, the per capita amount, I think, is not necessarily relevant in comparison, let's say, with the Atlantic provinces. It had more to do with the level of the provincial sales taxes in the various provinces.
The other comment I would make is that if every time there was some area of contention with the provinces the Government of Canada had to take everything to arbitration, I'm not sure that would be the most effective and efficient way to run government.
The people who were involved in those negotiations are not here. That would be part of our federal-provincial relations in the context of the Department of Finance. This bill doesn't really speak to that.
I can take your question under advisement. My gut feeling is that if the figures haven't been shared, it's probably because in any negotiating position it's not clear that you'd want to share all your numbers with the person you're negotiating with.
Mr. Richard Marceau: If I understand correctly, no further negotiations are planned. If the federal government is right, as it claims it is, then what harm would it do to go before an arbitration tribunal? You say that's not the most efficient way of conducting business in a federation if each time the provincial and federal governments disagree about something, they go to arbitration.
It all depends on your perspective. Right now, the federal government has taken a unilateral stand. It maintains that it won't award anything and that its decision is final. That's why I mentioned the problem to you and wonder if you might be willing to take the matter under advisement, as they say in English.
A voice: In French, the expression is "sous réserve".
Mr. Richard Marceau: That's right. Therefore if you decide to take the matter under advisement, I would appreciate our broaching the subject at a later date.
You said that this wasn't really what the bill was all about. The reason I brought this up was that you stated right at the start of your presentation that the harmonization agreement was a successful example of cooperation between the federal government and the provinces. That statement bothered me a little. Therefore, I will await your answer.
Mr. Roy Cullen: Briefly, let me just say that I was told the Government of Canada had provided information about this matter. I will be happy to provide the committee with any information I can.
Mr. Richard Marceau: And you will consider the arbitration proposal?
Mr. Roy Cullen: Yes. I will get back to you with an answer on that.
Mr. Richard Marceau: An answer in writing would be appreciated.
Mr. Roy Cullen: Fine. Perhaps.
Mr. Richard Marceau: Thank you. That's all.
The Chair: Mr. Marceau, as the president of the committee, you should always have your federal-provincial relations person available.
Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Mr. Chairman.
I see changes in the Customs Act specifically increasing the transborder...on liquor from 1.14 litres to 1.5 litres after one has been gone 48 hours.
Under free trade—and I did ask him to have this done before, specifically—for a lot of those who are in border communities, as I am, and of course, more specifically, most of the wineries that are in the border communities with the United States, I asked if it would have been part of the rebate that as an exporter I could export into the United States, provided I found a buyer, with relatively no tax included, or no residue of tax. That would mean for PST and GST put on at all stages, which accounts for more than 60% of the sale of the product, which is all taxes, being price-inclusive, they are not eligible for rebate when one crosses the border. Yet, on the other hand, other things are; they are able to rebate the taxes back.
Really, there's no benefit to the border communities. The only benefit it gives is to the exporter, but no one could have direct sales into the United States.
Years ago we had cross-border shopping. Canadians were flocking to the States. Yet we have not made it really that much easier where tax-included policies are in a price, so that those individuals could get a rebate.
Has the department seen anything worthwhile in that, to try to give us almost the same cross-border shopping that we used to have years ago in the States? Now it should be the other way around because of our lower dollar.
Mr. Roy Cullen: Ms. Légaré, would you like to respond?
Ms. Marlene Légaré: Actually, I'm going to ask a colleague of mine who works particularly in the area of customs tariff to speak to your question.
Mr. Roy Cullen: Did you understand the question?
Mr. Dean Beyea (Tariffs Officer, International Trade and Finance Branch, Department of Finance): I did understand the question. However, the changes that were made to the customs tariffs as part of this bill were to increase the personal exemption limit for wine coming into Canada when people were away more than 48 hours. It was a technical change to recognize the bottling practices in the wine industry. Liquor would come in 1.4-litre bottles and wine was generally bottled in 750-millilitre amounts. This would recognize the practice of bringing in two bottles of wine.
Mr. Gary Pillitteri: But nothing was done on the tax system; there was no rebate in the tax system because the tax is included in the price.
Mr. Dean Beyea: No. These measures were simply the personal exemption limits.
Mr. Roy Cullen: What are you suggesting, Mr. Pillitteri?
Mr. Gary Pillitteri: Well, I was suggesting, quite simply.... I had to ask the tax department to take a look at anyone coming in here and buying in Canada rather than just saying we would have benefited by being on the border community. The Americans could have bought without the full tax being on there. We could have benefited from the sales directly to the Americans. There's no other way we're benefiting from the free trade issue we have with the United States because they're such protective states and because they are so protective of their own jurisdiction.
Ms. Marlene Légaré: So what you're referring to is relief for taxes paid in Canada when they're purchased here and taken out of Canada?
Mr. Gary Pillitteri: Yes, to rebate their purchases.
Ms. Marlene Légaré: The tax they pay here. Okay.
This measure deals with the opposite; you're right. It deals with things purchased outside the country and brought back in.
I'd just go back to the mechanism in place for the GST purposes with respect to purchases in Canada that are for export. Our only mechanism in that regard is their visitor rebate. That does not presently apply to alcoholic beverages, however. This bill doesn't affect that.
Mr. Gary Pillitteri: It does not apply for rebate. On the other hand, I could be selling wholesale and it's quite applicable. Yes, we could sell a product without any taxes on the product. I could do it. If I find a dealer there, I could sell it directly there without paying a cent of tax, either federal or provincial. There is a total of seven taxes in there. Taxes make up 60% of the total value.
Thank you. There are just no provisions.
Mr. Roy Cullen: I guess the provisions would ensure that someone who bought the wine, if they were going to get any rebate.... They don't now, but if they were, you'd have to ensure that they were taking it outside of Canada. That could be accommodated.
In terms of alcoholic beverages, we can see what analysis has been done in the department and get back to you on that, Mr. Pillitteri.
The Chair: If you can table that with the committee, we'd appreciate that.
Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairperson.
I wanted to talk about tobacco tax. It's all over the radio and it's all over the newspapers right now. Can you frame for us the situation with respect to tobacco taxes and prices and how they compare with the comparable border states? How does the situation today differ from that of the mid-1990s?
Mr. Roy Cullen: I'll kick it off and then Mr. Willis can complete the comments.
What you saw in the press today or yesterday was that Mr. Martin, the finance minister, wrote to the provincial finance ministers in January, suggesting that the provinces get together with the federal government to look at what could be done with the excise taxes on cigarettes, obviously with the view of increasing them. This basically is in line with the minister's often-stated position that we want to get back to the 1994 levels.
In fact, since 1994 we've increased the excise taxes, collaboratively with the participating provinces, four times. There are discussions underway at the officials level with the federal government and the provinces. They will have meetings in June.
The number of $16 a carton was floated in the media. As I understand it, that would be the level that would be needed to get back to the 1994 levels in Quebec. In Ontario, I think it's about $15 a carton. Those numbers are conjecture at this point in time. It's a matter of balancing the increase in the excise taxes with the potential for smuggling and contraband.
Mr. Willis, maybe you could expand on that and talk particularly about our taxes and the price of cigarettes in Canada versus some of the bordering states, where they've come from and where they're going to.
Mr. Brian Willis (Senior Chief, Sales Tax Division, Tax Policy Branch, Department of Finance): Yes. Thank you, Mr. Cullen.
In the U.S. there was a settlement of health suits between the tobacco companies and the states about a year and a half ago. The result of that settlement was that the tobacco companies increased the price of cigarettes in the U.S. quite substantially and agreed to pay funds to the states, with respect to their health care costs, over the course of 25 years. That has raised the price of cigarettes in the border states as well as elsewhere in the U.S., and there have been suggestions that this should enable us to increase our taxes here.
To the extent that the contraband problem we experienced in 1993 was individual consumers purchasing in the U.S. at prices below those in Canada, that in fact is true. The problem today and the problem over a number of years has not really been that.
The problem we experienced in 1993-94 was an organized criminal contraband problem, where a product was sourced without any U.S. taxes or U.S. settlement amounts in the price. The product was sourced on what is called the export and duty-free market. That market does not include any U.S. taxes or any Canadian taxes, nor any amounts that are paid under the settlement. Hence, tobacco products are still available in those markets today at the same prices that existed in 1993.
As Mr. Cullen has just said, in looking to restore tobacco taxes, we need to be cognizant of the fact that there still are sources of supply at very low prices. We need to ensure that there are measures in place to control the potential for contraband to reoccur as it did in the 1991 to 1993 period.
Ms. Karen Redman: Thank you.
The Chair: Mr. Szabo, do you have any questions?
Mr. Paul Szabo (Mississauga South, Lib.): Mr. Chairman, with regard to health and education, I was looking at the briefing notes. My question is with regard to the impact of the tax burden on the health services.
In the briefing notes it said that the amendments were proposed in order to reduce the tax burden imposed on institutions. Do we have studies that show that making these changes will have a substantive or significant effect on the level of service provided?
Ms. Marlene Légaré: I can certainly inquire as to whether we have statistical information that we could pass on. I don't have anything with me today.
Let me summarize briefly what the measures are in this area. What you'll see is that the direct beneficiaries of this are recipients of health care services, consumers, in terms of their being able to acquire services without paying tax, whereas prior to these amendments, these services were taxable. To the extent that they benefit, it would be measured in terms of how much consumers would pay.
One of the areas is respite care, as Mr. Cullen mentioned in his opening remarks. It's a type of service that is important to families and individuals who are caring for another person who is perhaps disabled or elderly.
The GST legislation already has an exemption for what we call homemaker services, where the provider comes into the home and does such things as help with light housekeeping, meal preparation, and so forth. We didn't have a provision to exempt the same type of service when that was provided outside the home, unless the individual was in an institution like a health care facility or a nursing home. There are more day care types of facilities that are available, and there's obviously a cost to those services. Without this specific exemption, GST is applied on top of that. One of the measures in this bill is to exempt those health care services, the respite care services.
Another important measure in the bill is to address another kind of anomaly in the GST system. We recognized that for persons with disabilities, they incurred additional costs when they acquired vehicles—having to adapt those vehicles to accommodate, say, a wheelchair and so forth. There was a specific exemption in the GST—there still is—for the cost of these services of adapting a motor vehicle. But we were told there are some companies that produce the vehicles fully equipped and so they sell them with these special features already on the vehicle. That wasn't specifically exempted, so the exemption is to extend there.
Mr. Paul Szabo: The interesting debate is whether or not this constitutes health spending or tax cuts. There's probably a good argument for both, and yet in terms of our contribution to the health of Canadians, this would not be counted in the current mechanics of determining health care costs.
Mr. Roy Cullen: That's true. That's a good point.
Mr. Paul Szabo: I only raise it from the standpoint that in your motivation it sounds like the principle is that this is the kind of expenditure for which excise tax components, in terms of policy, should not be applicable. Are there any other areas? We've carried this so far. Is it the policy that basically health spending shouldn't just be where it's medically necessary, but maybe even broader than that, because there is a level of health expenditure incurred by Canadians that continues to be subject to a tax burden?
Ms. Marlene Légaré: Your question is, are there other areas where we could perhaps...?
Mr. Paul Szabo: Have we gone far enough?
Ms. Marlene Légaré: I think it's an ongoing process of examining and receiving representations from taxpayers and from service providers on areas where taxes are currently applicable and that perhaps weren't contemplated at the time the GST was first introduced. The two examples I gave were just that, a situation where these were the kinds of services that had not been contemplated, and when representation was made to the government that it was inappropriate that tax should apply in these circumstances, the government agreed and gave the exemption.
I would say that process is an ongoing one. And there may well be services out there that are being taxed and that we may hear about. We are always prepared to look at those situations and make sure it is consistent, as you say, with an overall policy of exempting health care services, which is the principle underlying these exemptions in the GST.
Mr. Roy Cullen: The other thing we should keep in mind, it seems to me, is that we're looking at it today in the context of the GST and the HST, but there are other measures that have been introduced in many budgets for disabled people. I could say that it is an area the minister has a keen interest in, and it's like everything else; the shopping list is always longer than the means to deliver it. But I think we're moving in areas that are seen as priorities. There's more to be done, and more will be done, I'm sure.
The Chair: Thank you, Mr. Cullen.
The final question is from Mr. Forseth, and then we'll listen to Mr. Rob Cunningham, senior policy analyst from the Canadian Cancer Society.
Mr. Paul Forseth: Thank you. I'm looking at the matter of general principle of exemptions of the GST. We have clause 75, which addresses some compassionate consideration for those people buying specialized vehicles because of a disability. We have in the next clause GST considerations for people needing special home care.
So throughout the bill we're into the principle of GST exemption for special circumstances. Yet the Minister of Finance responds to British Columbians and says, related to the leaky condo situation, no such provision can be provided because it violates principles. If I ever thought we had a section of the population that needed compassion and consideration under the GST...that section should be done. Yet the minister—I have it in writing—in questions on the order paper, is defending non-compassionate consideration for those who could clearly qualify through the provincial home protection office for that kind of consideration, because it violates some general principle.
The point I'm making is that we're well into this game, you might say, of providing GST exemption for certain compassionate grounds or consideration, and certainly that should also be considered for those who legitimately have a leaky condo problem. The government should not be profiting from the human misery and tragedy of others.
Mr. Roy Cullen: Mr. Forseth, the government I know is quite empathetic to the situation of the people who bought leaky condos. First of all, we need to understand and recognize that most of it falls into the area of provincial jurisdiction in terms of codes and also contractual obligations. But having said that, the Government of Canada has indicated it's prepared to negotiate, and has actually made some offers, which have been rejected. There is also a huge initiative through the CMHC to provide people with information on how to try to rectify the situation, how to avoid this in future.
I guess your question is, how do we deal with situations for disabled persons and people in these sorts of situations and not deal with people who are in leaky condos? It's not a science. But the challenge before us on the GST and HST is always that once you make certain exemptions that are not.... In my case, these are fairly obvious things that don't really require a lot of lost revenue, and they're dealing with a very serious situation. The leaky condos are a very serious situation, don't get me wrong, but it opens it up to all sorts of other situations where people would lobby the government for relief on the GST.
So I'd have to say the government has been very tough on GST relief, except in obvious areas like these where the revenue loss is not significant, doesn't really set much precedent, and it's clearly for a compassionate response. I hear what you're saying, but the federal government's response has been through other means in trying to deal with that very difficult situation.
Mr. Paul Forseth: Thank you.
The Chair: Thank you, Mr. Forseth, Mr. Cullen, and also to the officials, thank you so much for your contribution. I'd also like to add the name of Gregory Smart, from the tax policy office in the Department of Finance, as well for his contribution.
We'll now call Mr. Rob Cunningham.
I'm going to suspend for two minutes to get set up.
The Chair: I would like to call the meeting to order. I want to take this opportunity to once again welcome Mr. Rob Cunningham, senior policy analyst with the Canadian Cancer Society.
As you know, you have approximately five to ten minutes to make your presentation, and as you probably witnessed earlier, we will engage in a question and answer session right after your presentation.
Mr. Rob Cunningham (Senior Policy Analyst, Canadian Cancer Society): Thank you, Mr. Chairman, for this opportunity to speak to the committee on behalf of the Canadian Cancer Society. We support the measures contained in Bill C-24 with respect to the taxation of tobacco products.
We want to support the measures in Bill C-24 to increase the excise tax on tobacco products, particularly cigarettes and tobacco sticks, and make permanent the surtax on tobacco manufacturer profits. You have, on page 3 of the handout before you, something that follows up on the question put by Ms. Redman with respect to the relative prices on both sides of the border in terms of provinces and U.S. border states. I'll be referring to this in a moment.
I also note that in Bill C-32 there are some changes with respect to first nations ability to impose sales taxes with respect to tobacco products. That is a different bill, but I also wanted to go on record to support the provisions in that particular bill.
All members of this committee recognize very serious health consequences related to tobacco products. All parties support the need to reduce smoking in the general population and among youth in Canada. We have supported the past increases in excise taxes that have occurred since the very significant 1994 tax rollback. And we agree that there is significant room for a very large increase in tobacco taxes.
Our recommendation in October 1999, prior to the increase that this bill is implementing, was for $10 per carton. Right now, Ontario and Quebec have the lowest tobacco taxes, the lowest cigarette prices in North America. We see how at $32 per carton the prices are much lower than $52 in Michigan in Canadian dollars and $57 in New York State. If we look in the tobacco belt, such as Virginia and Kentucky and so on, it's around $37 Canadian per carton in North Carolina.
Even if we had a $5 further increase in prices—and this tax math is after the implementation of the tax increases contained in this bill—we would then be tied as being the lowest in North America. There's an opportunity for the public revenue of government to benefit in terms of having additional revenue to then use for government objectives and for public health to benefit by having reduced smoking.
This bill had an increase in the tax on tobacco sticks, which is an example of a product I have with me. It's a loophole that currently exists that allows this particular product to be taxed at a lower rate than cigarettes. We don't think there's any reason for this loophole to exist. And the tobacco manufacturers, ever innovative to exploit loopholes, came out in December 1997 with this new type of tobacco product where all the consumer has to do was just stick a piece of paper, sort of the filter overwrap, on the end of the cigarette and have a cheaper-priced product.
A number of provinces have interpreted their legislation or have moved to ensure that there is not a loophole, and we would urge the Government of Canada to fully close this loophole as soon as possible.
Tobacco manufacturers, in terms of their profitability, are doing very well. Imperial Tobacco's annual return on assets exceeds or is approximately 100%. There aren't many significant industrial sectors that are able to have that level of profitability consistently.
When the surtax was imposed in 1994, the government intended that the revenue from the surtax would be used to fund an educational campaign to reduce smoking, to counter the effects of the lower tobacco taxes. This was in place for a couple of years, but we've seen significant cutbacks since then, and the tobacco control budget is now only $20 million. I think the surtax revenue is now about $80 million or $90 million per year.
So there is a tremendous opportunity for the Government of Canada to reinstate its initial commitment with respect to the revenue from the surtax and to increase the funding for tobacco control so that Canada is closer in line with some other jurisdictions, such as California, which has a per capita funding of about $4 Canadian per capita. Sixty-seven cents is our current Canadian funding, while Massachusetts is about $8 Canadian.
Will there be smuggling if there is going to be a significant increase in tobacco taxes? No, is my submission, and there are a number of reasons for that change. We see how prices in the United States are far higher than they were at the time that smuggling was quite significant in 1992 and 1993. We do not see smuggling flowing the other way now. We don't see smuggling flowing from Ontario to New York state, for example. We do not see significant international smuggling entering the United States.
There is some interprovincial smuggling in Canada, but if we were to significantly increase the prices in Ontario and Quebec, we would be able to respond to that. Why is there interprovincial smuggling? Because we have low tax provinces in central Canada.
A very interesting thing is that RJR-Macdonald, now JTI-Macdonald, which was a company named in the December 1999 racketeering lawsuit by the Government of Canada under the U.S. Racketeer Influenced and Corrupt Organizations Act, now has a new parent company, which is ultimately owned by the Japanese government.
I venture to say that it would not be possible for any company, particularly a company whose ultimate owner is a foreign government, to get away with the type of actions and complicity that we saw during the period of high smuggling. If there are not manufacturers providing a source of supply, we are not going to have significant smuggling.
With a sufficient export tax in place—and I know this bill has some steps in the right direction with respect to addressing some of what we see as deficiencies in the export tax—and with the scrutiny of the media and law enforcement authorities, we are not going to have the smuggling or the manufacturers' complicity.
Further, with the manufacturers having the financial interest to minimize smuggling, they will take steps to ensure that if there is a hint of smuggling coming from international sources, from companies that are unaffiliated with themselves, they will quickly work to cooperate with law enforcement authorities to make sure it never becomes a significant problem, just as they worked quickly to ensure that counterfeit tobacco products never became a significant problem in terms of percentage of the market.
Thank you, Mr. Chair.
The Chair: Thank you, Mr. Cunningham.
Mr. Forseth, do you have any questions?
Mr. Paul Forseth: Thank you.
Certainly I liked your comment that cheap tobacco policy is not good social policy. I've never been a particular supporter of the tobacco industry, but when I look at the map here, which very clearly shows the disparity rates.... Besides just simply giving a direct appeal showing the disparities and saying where the tax room is, can you perhaps give us any background information about your research as to why we have this inequitable situation of a rate of $31.50 in Ontario and a rate of $32.50 in Quebec? Why would that be? There must be some underlying reasons for that.
Mr. Rob Cunningham: I think there is a concern on the part of government that a significant increase in tobacco taxes would lead to smuggling. I don't agree with that concern. I think things have changed with the recent—well, it's now a year and a half old—increase in American prices. We've demonstrated that we haven't had smuggling flowing into the United States the way some people initially predicted would happen very quickly. I think there's a tremendous opportunity, and I was very pleased to read in the media this morning that the government is looking at fundamentally re-examining this issue.
Mr. Paul Forseth: I assume you have good data to show that price sensitivity is directly related to especially the take-up rates of young people getting started in the first place on that particular margin. Certainly we want to discourage young people. Now it's down into the elementary school level where kids are getting started. Do you have some good studies on price versus take-up rates, especially at the elementary school level?
Mr. Rob Cunningham: We are very concerned, of course, with smoking among young people. There are lots of studies and other types of evidence on how higher prices discourage consumption. Some of that evidence comes from internal tobacco company documents and their own studies as to their concern about the starting rate decreasing because of higher prices. There was a Department of Finance study in the early 1990s that concluded that young Canadians were more price-sensitive than adult Canadians as a result of higher prices.
I would just note that with the roll-your-own tobacco products that are on the market, because roll-your-own is taxed at a lower rate, manufacturers are taking advantage of this. They have this new type of product that puffs up the tobacco so that less tobacco by weight is needed to make a cigarette. You get 70% more tobacco for the same level of taxation.
The de facto price for 200 cigarettes, if this product were purchased in Quebec, would be about $17. When we see that we have a price for cigarettes of about $32, including taxes, we say there's a tremendous gap with respect to roll-your-own. That's something that's in our October report. We urge the government to address this. It's not included in this bill, but that is something that responds to the price sensitivity question.
Mr. Paul Forseth: What are those two other containers beside you?
Mr. Rob Cunningham: These are also roll-your-own tobacco. This is one brand that makes 200 cigarettes with only 90 grams of tobacco. The traditional unit of equivalency was that one gram equals one cigarette, but now you can get 200 cigarettes for just 90 grams.
This is another one that looks the same, but it has 206 grams and it will make 350 or so cigarettes.
The Chair: Were you interested in any of them?
Mr. Paul Forseth: I never cease to be amazed at the new marketing angles and nuances of the tobacco firms, that's all. I'm done.
The Chair: Mr. Szabo.
Mr. Paul Szabo: Certainly the issue of the tax burden on cigarettes has been with this government since 1993-94, when we first went in to address the smuggling issue. There's no disagreement with regard to the need to address the health impacts related to smoking.
There are many players in this, not just externally but also in Canada. I'm wondering whether you can tell us if there is a consensus among the interested parties as to the strategy being employed or proposed with regard to increasing taxes and whether in itself it's viewed to be a viable strategy without other supports to make sure we don't have another false start, as it were. Who's not on-side?
Mr. Rob Cunningham: Tobacco manufacturers certainly would not be on-side for a significant increase. They're not going to object to a moderate increase, but they wouldn't agree with something in the order of what we recommended, which was discussed in the media today. That was $10 to $16 per carton.
Provincial governments vary. I think governments in western Canada would very much like to see prices go up in central Canada, which would help them address the issue of interprovincial smuggling. In terms of Ontario and Quebec, which are provinces that have lower tobacco taxes provincially than western Canada does, we would certainly like them to be on-side.
Ontario's Tobacco Tax Act is interesting. Uniquely, it's structured in such a way that if the federal government wished to increase tobacco taxes, Ontario's Tobacco Tax Act would automatically match it, so they don't have to make an adjustment themselves in terms of an announcement or a decision and so on.
While the federal government has said in the past when they've made tobacco tax announcements that they wanted the agreement of the provinces, including Ontario and Quebec and so on, the Atlantic provinces have higher tobacco taxes than Ontario and Quebec and they would really want to see Ontario and Quebec move. The federal Minister of Finance did say that he could move unilaterally. The Globe and Mail reported that there was a committee at the Liberal caucus with a committee report in June 1999 recommending that the federal government move unilaterally if the provinces didn't cooperate, and that's certainly our recommendation.
Mr. Paul Szabo: In terms of getting the overall results—obviously this is one part of the comprehensive solution, a broader approach—recently I received letters from a number of major printers who have expressed concern generally about what's going on, but specifically with regard to changes to the packaging and to the possible changes in labelling, which would, for instance, make it difficult for printers who use the rotogravure process to be able to meet those new specs.
In one letter, they told me there would have to be an additional investment in the neighbourhood of $8 million to $10 million in new equipment to be able to meet these specs, and that since there is no additional unit output expected but there will be this higher capital cost, they can't justify it economically and therefore a lot of jobs will be lost. I wrote back and asked, if the specs were going to change and capital improvements were necessary to meet those specs, couldn't they pass those costs on? They said no.
So in the scheme of, say, the economics of the production of even the packaging of tobacco, is there a relationship between the printing industry...? Are you aware of whether it would be contractual obligations or whatever that would drive printers to oppose moves with regard to reduction of tobacco use simply because it would cost jobs? Is there a motivation other than that they don't care about the impact of the tobacco law, that all they want to do is to continue to print?
Mr. Rob Cunningham: This is an interesting issue. I know, Mr. Szabo, that you sat on the Standing Committee on Health in 1994, which considered plain packaging, and when the proposal then was to minimize the number of colours, they said jobs were going to be lost. The committee responded to that concern and asked that the government consider making packaging more complicated. That's what the government has done.
I see this as a tremendous business opportunity for printers, because more sophisticated packaging means more work for them and more revenue.
Can they pass it on to their customers? Absolutely. That's what they're going to do. Can tobacco companies afford to pay it? Absolutely. This argument about jobs that are going to be lost.... Parliamentarians know that has been around for decades whenever tobacco control measures have been prepared.
The printers are doing the bidding of, doing the request of, tobacco manufacturers. Tobacco manufacturers do not like to propose new warnings—they're very impressive, and we commend the government for them. There's tremendous research which demonstrates that they're going to have an impact on reducing smoking.
Also, the printers have an international opportunity for additional business. When Canada's new warnings become the model for other countries, in fact, printers in Canada that supply tobacco manufacturers in other countries are going to have an export opportunity, because they will have become specialists in the sophistication of this type of packaging. There's more value added and therefore more business.
Mr. Paul Szabo: Okay. If we go ahead with the more sophisticated printing and if, as you suggest, the tobacco companies likely will seek to pass on as much of that cost as possible to the consumer, all of a sudden the economics of it, the equation, becomes a little different. If you have increased taxation as well as an increased manufacturing cost, production cost, is it expected that it is going to raise the prices to levels that may have some unintended consequences? I guess the question is, what happens to consumer demand, particularly among youth, as the price goes up? Is there a price to which you can't go without having some other unintended consequences?
Mr. Rob Cunningham: Yes. I think the impact of the incremental costs on an ongoing basis for the new package warnings is going to be pennies a pack—a penny a pack or less. I mean, it's very small. So it will not have any material impact whatsoever on the risk of contraband.
I think as you go up in price, at different thresholds, different people will be impacted. So there may be somebody for whom it may have an impact at $4 a pack, for somebody else it may at $4.50, and for someone else at $5. The more you go up, the more people will be discouraged. So I don't think there's a cumulative concern about the possibility of increased cost because of packaging and increased tobacco taxes.
Manufacturers, every April—I don't know what their increase was in 2000—have had an increase of about 50¢ per carton. This is many times the incremental cost to implement this packaging change, and close to the 60¢ federal increase in tobacco taxes in this bill.
Mr. Paul Szabo: Thank you.
The Chair: Thank you very much, Mr. Szabo.
Mr. Cunningham, once again on behalf of the committee, thank you.
Mr. Rob Cunningham: Thank you.
The Chair: The meeting is adjourned.