FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, June 15, 2000

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[English]

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

As we all know, the order of the day is Bill C-213, an act to promote shipbuilding, 1999. The witnesses from the Department of Finance are Gérard Lalonde, senior chief, tax legislation division, tax policy branch; and Mr. Bob Morrison, senior tax policy officer, tax policy branch, business income tax division, economic development.

Welcome, gentlemen. As you know, you have approximately the time it takes to read your seven pages, I think it is. Take the time you need and then we'll engage in a question and answer session.

Mr. Gérard Lalonde (Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada): Thank you very much.

My name is Gérard Lalonde. I've been with the Department of Finance for some 18 years, having started there with the business and property income group as a junior tax policy officer. In that time, I've seen a lot of tax credits come and go as the policies of the government have varied from one direction to another.

I'm appreciative of this opportunity to discuss some of the issues that are raised by Bill C-213, an act to promote shipbuilding.

I understand that officials from Industry Canada have already testified on the issues surrounding shipbuilding in Canada. I would like to constrain my comments to the merits of various types of mechanisms that can be used to provide assistance.

First, I should probably mention some of the existing tax incentives that are in the Income Tax Act. Currently, Canadian-constructed ships are entitled to an accelerated capital cost allowance of 33 1/3% based on a straight-line basis. When you combine this with the half-year convention, that means that ships can be fully depreciated over a four-year period. This compares favourably with the 15% declining balance CCA rate applied to other types of vessels and with the estimated economic depreciation rate for ships of between 7% and 8.5%.

Canadian-constructed ships benefit from a more generous tax depreciation system than ships in the U.S. As well, it is favourable compared to the... Rather, the U.S. rate is an equivalent of a 20% declining balance rate.

The present value of the federal tax support provided by this straight-line accelerated capital cost allowance is comparable to about 5.8% of the cost of the asset. In other terms, it is comparable to a 13% investment tax credit when you take into account provincial income taxes.

It's also possible that the cost of new vessels acquired primarily for use in Atlantic Canada may be eligible for the 10% Atlantic Canada investment tax credit.

Those are the existing tax measures.

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My following comments canvass some of the issues and concerns that arise in the context of the various types of assistance proposed in Bill C-213.

Bill C-213 proposes two main measures on the tax side, one of which is a refundable investment tax credit and the other is relief from the leasing property rules.

A refundable tax credit, as the name implies, is a tax credit that is refundable in computing the taxpayers' income. As such, it's a little different from a grant. The delivery mechanism is quite different, and that's what I'd like to focus my comments on.

With an investment tax credit you have to use the tax system as a base for delivering the credit, and this imports some unique features as compared with a grant. For example, with the tax system as a self-assessment system, the base for the credit runs off the tax legislation. As a result, you really have to suffer with the limitations of the English language—or the French language, as the case may be—and these limitations present some challenges. For example, often you'll find that deserving taxpayers, taxpayers in need, won't get a particular credit simply because they can't bring themselves within the words of the tax law. In other cases, tax benefits will be delivered to people or corporations that were not contemplated when the program was originally put in place, simply because they've managed either to put themselves within the words of the law or have serendipitously found themselves in a situation where the tax credit applies to them.

The upshot of those comments is that the tax system implies no discretion in delivering a benefit. If you qualify, you qualify, and if you don't, you don't, and that's about all there is to it.

There are some other features of a tax credit that do come into play, however, that can seem perverse. One of these is that the benefit from a tax credit generally doesn't show up until such time as the taxpayer files the return claiming the credit, and then only after it's assessed by Revenue Canada. Accordingly, if you were a corporation and you incurred an expenditure at the first day of your taxation year and you hoped to get a refundable tax credit in respect of that expenditure, you would have to wait not only till the end of your taxation year, approximately a year away, but another six months for filing your return and another 60 to 90 days after that before Revenue Canada would assess your return.

Some might view this as an inordinately long period to achieve what was hoped to be a cashflow benefit. On the other hand, and somewhat perversely, those corporations that are in least need of the assistance—that is, those that are fully profitable and fully taxable and can fully absorb the credit—can achieve the benefit of the tax credit immediately by reducing their corporate tax instalments. This is somewhat backwards in terms of providing the most assistance in the most efficient fashion to those who are most in need.

These features have resulted in a situation where internationally there's been a general trend toward reducing or eliminating investment tax credits.

There's another reason for the general reduction in the tax system of the use of investment tax credits that has to do with international trade, and that is the fact that they can be found countervailable for the purposes of foreign countries levying countervailing duties. That's not to say that we don't use tax credits. Clearly, tax credits are of most beneficial use in what we've referred to as a demi-grant. One example of that might be the basic personal credit. Every individual gets it. It's easy to calculate, the base is easy to calculate, and it shows up directly in calculating your income tax each year.

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Income tax credits are less useful in those circumstances where you're trying to deliver assistance, either to a small group of people, or in respect of a base that's somewhat amorphous. You'll notice in that regard that there has been various testimony from the Department of Finance over the years on the use of investment tax credits.

Currently, there are only two investment tax credits left in the system. One is a vestige of an across-the-board investment tax credit mechanism that is now only in place in respect of Atlantic Canada. It is at a rate of 10% and applies for a variety of industries; it's not industry-specific. That is important, because the industry-specific measures have in the past been found to be countervailable. The other is the investment tax credit for scientific research and experimental development. This has been a longstanding feature of the tax system.

That brings me to the end of what I was going to say about investment tax credits.

Moving on to the leasing restrictions, Bill C-213 also proposes that the tax system relax the existing leasing restrictions. Currently there are two leasing restrictions in place, one of which is generally known as the leasing loss rules. Those rules prevent a taxpayer other than a principal business corporation from creating or increasing a loss through CCA on leasing property.

The other restriction is specified leasing property rules. These rules deal with relatively large leases of over $25,000 of assets. They're designed to recognize the commercial reality that financial leases are an alternative form of financing, no different from a loan, and from a tax perspective should be treated no differently from a loan. The specified leasing property rules attempt to recast the lease as a loan and provide the appropriate tax treatment.

As a corollary to providing a treatment under which the lessor is treated as a lender, the lessee may also make an election under which they're treated as being the owner of the property and can claim the 33 1/3% accelerated capital cost allowance.

Last, there was some comment about the tax treatment of provincial investment tax credits and that the federal government taxes these credits. Clearly, these credits do have an impact on your bottom line in terms of tax payable. However, the policy isn't as easily expressed as simply a matter of taxing the credits. Rather, the policy is to try to tax the appropriate tax base. Perhaps an example would be appropriate in this regard.

If you were a business and you had acquired some widgets, either because you purchased them or constructed the widgets yourself, and your cost of those widgets was say $100 and you are going to sell them for $110, quite clearly, your income in that circumstance would be considered to be $10, the difference between the two.

Suppose a provincial government gave you another $15 of assistance as a grant toward the cost of constructing those widgets. Instead of costing you $100 to construct the widgets, it now only costs you $85. If you in turn sold them for $110, one would expect you to have $25 of income, not $10, the reason being that part of your cost of constructing the widgets has been absorbed by somebody else—that is, the provincial government, to the extent of the $15 it contributed.

The difference between the two—that is, the difference between saying that we tax that assistance and the other example where we take it into account in calculating the value of your property and your income—is that if you took the same example and discovered that the market had fallen and unfortunately you were only able to sell the widget for $85, in that case you would have neither an income nor a loss and there would be no tax payable, notwithstanding that you had received $15 worth of provincial assistance.

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Those are my comments. I'm open to questions from the committee.

Thank you very much.

The Chair: Thank you, Mr. Lalonde.

Mr. Dubé.

[Translation]

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): Unfortunately, there are not many people here today. It is the last day of the session. I would like to thank my two colleagues from Ontario for being here. This subject is usually of interest to the people from the Maritime provinces, but that does not seem to be the case today.

I have a question for you. I introduced my bill after having consulted with people from the industry. When I say industry, I mean the big shipyards that belong to a group called the Shipbuilding Association of Canada; they submitted a brief to the federal Finance, Transport and Industry departments.

I would like to know if you, personally, or Mr. Morrisson or someone else from your group have had any recent discussions of these issues with representatives from the shipbuilding industry.

[English]

Mr. Gérard Lalonde: There were some representations made to the department by representatives of the industry about a year ago. Those representations were in particular for relief from the leasing property rules. They met with our deputy, or in our deputy's office.

I don't know that I'm at liberty to indicate the particular people who had come to see our deputy, but certainly we discussed the issue and we explained to those individuals the policy behind the specified leasing property rules and the leasing loss rules.

In particular, if you were to provide an exception for both of those in respect of shipbuilding, the concern is that you would wind up with effectively a retail-level tax shelter.

Now, maybe I should just step back for a second and explain how this creates a tax shelter. Generally speaking, a classic definition of a tax shelter would be one where the deductions you're allowed to claim for income tax purposes exceed your actual cost. For example, if you had an asset that did not diminish in value at all, or that actually appreciated—but let's use the example of not diminish at all, so that you still have the asset—you can still convert it to cash if you wanted to but you get to deduct the capital cost allowance in respect of that cost.

If you take that example one further, it would be an asset that does depreciate but the depreciation allowed for tax purposes is far in excess of the actual depreciation. In the case of a ship, then, a certified Canadian vessel, if it weren't for the specified leasing property rules you would otherwise be allowed to claim 33 1/3% on a straight-line basis, subject to the half-year convention.

As I mentioned, that allows you to write it off over the course of four years. Well, quite clearly a ship lasts more than four years, so if you were allowed to write off your income immediately, write off the cost of the ship against your income immediately, and yet keep the ship and have access to the cashflow and the funding it creates, that is a classic tax shelter.

Now, the concern is that we put in some rules that say “If you're the user-operator of the ship, well, you can claim that 33 1/3% capital cost allowance and reduce your income because you're reducing income from the same source.” But if you're somebody else—if you're a lessor, say—now you're not reducing income from the same source, you're reducing income from some other source. In the case of a retail-level tax shelter, it could be, for example, individuals.

One might say, “What's the problem with that? You were willing to absorb the tax loss in the context of the user-operator, so why wouldn't you be willing to absorb the tax loss in the context of the lessor?” Well, unfortunately it creates other problems for the government. As you know, we have a self-assessment tax system, and we rely on the Canadian public regarding the tax system as having some level of integrity. That diminishes when the Canadian public is able to see the banker and the lawyer and the doctor down the street bring their income to zero and pay no tax as a result of investing in these various tax shelters.

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As a result, a variety of mechanisms have been put in place in the bill to try to constrain tax deductions that could otherwise be regarded as a tax shelter to the source to which they relate.

One example is the specified leasing property rules. Another is the leasing loss rules. Another would be the rules on the limited partnership at risk. Another would be the various stop-loss rules incorporated in the Income Tax Act for non-arm's-length transactions. So a whole host of provisions in the bill try to in essence stream deductions against the income to which they relate.

That's the basic problem we have with the leasing property rules. On the one side, you can say yes, they do have a benefit in facilitating finances, quite clearly, because they help evaporate the tax otherwise payable by the lessor. On the other hand, there is the structural downside that you wind up having various types of tax shelters in the system, which reduces the integrity of the tax system.

They also talked to us about investment tax credits. As I mentioned earlier, from our perspective, a tax policy perspective, a refundable investment tax credit is little different from a grant.

[Translation]

Mr. Antoine Dubé: I receive a great deal of information, but what I wanted to know was simply whether or not you had met with people from the industry. I am a patient man, but I will run short of time for my other questions if you take too much time in answering them.

May I ask more questions?

[English]

The Chair: Well, it's important to not only know that he met with them but also to find out what they said, right?

[Translation]

Mr. Antoine Dubé: Yes.

[English]

The Chair: But I do understand. I think we got a pretty good synopsis of what the conversation was like.

Further questions, Mr. Dubé?

[Translation]

Mr. Antoine Dubé: I'm not taking any chances. I will ask three or four questions.

First of all, I have a comment to make. You did not state it in your presentation, but in your brief, you say that the tax credits could be challenged by the WTO. I might tell you that last week I put a question to Mr. Saint-Jacques from the International Trade Department and he answered that never, to his knowledge, had there been a complaint about that made to the WTO. There was the threat of a complaint between Europe and Korea, but it seems that the conflict was settled. So there has never been a complaint.

The Government of Canada has never filed a complaint, even though the United States have protectionist measures that go against WTO criteria. Nor has Canada complained about the subsidies given by Europe and other countries.

In that context, I pointed out that Canada is the only country to respect the spirit of the WTO rules regarding shipbuilding, as well as the OECD rules, that have never been applied. That's the context in which we find ourselves.

You then spoke about tax shelters. According to numerous international experts, shipbuilding is an area where privileges and tax shelters abound in other countries. That is why we are trying to elaborate a policy framework that would more closely respect what you are talking about.

How can you say that we risk a WTO challenge because of our definition of tax credits if that has never been done before? That is my first question.

Secondly, why is it that Quebec, which has had an applicable tax credit since 1997, has never been challenged in any way? That applies to other countries as well. Why aren't other tax rules that exist in British Columbia, for example, not challenged more often? Therefore, no one is seeking redress from the WTO. Why tell this committee that we might be vulnerable in that area?

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My third question involves the tax credit. When you say that a shipyard is not profitable, that is something that I understand. There is no perverse effect in view of the taxation rate in Canada. Since this is a federal regime, both the provincial and federal governments can tax. That is at least the case for Quebec. But if there is a profit, the profit generated by the Quebec tax credit is to a certain extent reduced because of the federal tax. It is therefore a provincial measure that becomes offset.

I will restrict my intervention to those three questions, even though I could ask many more.

[English]

Mr. Gérard Lalonde: Thank you very much.

First, on the potential challenge—or a potential challenge—for tax credits, we used to have a number of investment tax credits in the Income Tax Act that applied in various ways. For example, we had a construction industry investment tax credit. We had a transportation industry investment tax credit. We had investment tax credits that applied in prescribed, designated regions. We had a special investment tax credit that applied in the north.

Those investment tax credits attracted the interest of other countries in the context of countervailing duty petitions. I personally have had to testify, for the U.S. and their commerce department people, to try to describe the Canadian investment tax system and why it was not countervailable. In that context, there were a number of challenges. There was one against Canadian tubular steel products—pipes, in other words. There was another one for those things that fit in frying pans, those little thermostat things you put in. Apparently, for some reason Canada is able to—

[Translation]

Mr. Antoine Dubé: But that does not apply to shipbuilding.

[English]

Mr. Gérard Lalonde: No, but the point is, it can hit a variety of industries. It's not industry-specific in terms of the complaints that can be made to Canada. I'm not saying that there will be a complaint. I'm saying that investment tax credits are not immune from challenges under countervailing duty petitions, in the same way subsidies are not immune.

The point I'm trying to make is that if one were to choose a subsidy method to deliver benefits to any particular industry, be it either as a grant or a tax credit—and a refundable tax credit is pretty well the same thing as a grant—my point is that there's no magic in going to an investment tax credit and saying “Well, there, we have a tax credit, and that's going to be so well buried in the tax system it's not countervailable.”

In fact, it's been found to be countervailable before, in a number of cases, including, as I say, tubular steel, these thermostats, and limousines. Even flowers were countervailed.

So that's what my point is on that one.

On your second point, that a corporation was neither profitable nor at a loss, and broke even—for example, it cost them $100 to produce the widget and they sold it for $100, so they're even—but then the province comes in and gives them, in your example, a $15 tax credit—

[Translation]

Mr. Antoine Dubé: I wanted to talk about a company that is profitable and that, therefore, is taxed by the federal government on a reduced profit basis. We are, of course, talking about a slight profit, because this sector is never very profitable, but in such a case, federal taxes offset the provincial measure. I wanted to talk to you about that type of situation, where they are making money.

I have an example in mind. I cannot disclose the name of the company, but they did tell me that at this time, it's the federal system and dual taxation that is penalizing them.

[English]

Mr. Gérard Lalonde: I guess I can't agree with you that it's a “double” taxing regime. The notion is that the provincial assistance is taken into account in calculating income. That doesn't necessarily mean whether the company is going to be taxable or not taxable; it's something you have to take into account in determining the profit of the company.

Quite clearly, if somebody has funded some of your costs you become more profitable, and the fundamental idea of the tax system is that we tax profit. We don't particularly care where that profit came from, whether it came because you sold the product for a higher price or because your costs were reduced. The fact of the matter is, we tax profit.

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In the same way, if you have individuals... I'm working for the Department of Finance, and I have my salary, which is my income for the year. Somebody else works for a farm, and they have their salary for the year. We don't look at it and say, well, this is one kind of income and that's another kind of income and we're going to tax them differently. We just recognize the income.

When you have a subsidy towards cost, quite clearly your costs are reduced, and that causes your income to go up or your loss to be reduced.

[Translation]

Mr. Antoine Dubé: I may come back to that on a second round.

The Acting Chair (Mr. Paul Szabo (Mississauga South, Lib.)): Yes.

[English]

Mr. Pillitteri.

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

Yes, Mr. Dubé, this is not only of interest to Atlantic Canada. Some of us in Ontario have shipbuilding. I happened to grow up beside Port Wheeler Dry Docks, which are still in existence and are still building ships. So it is of interest to all of us across this country.

Let me ask you a question on the shipbuilding. We hear so much, especially in the House, about the Monroe doctrine, that we we're being left out of building ships in Canada and kept out of the United States market. And then there are the heavy subsidies in Korea, with whom we no longer really can compete.

I want you to explain to me two things. Being a businessman, I understand that in writing off it's far greater to receive a write-off in four years than in twelve years. It's far better, and it's much more beneficial to me. That's one part.

Secondly, how does that compare vis-à-vis the United States or other countries? Really, if there's a product we can build here in Canada, are we being barred from bringing these ships into the United States because you have to have so much of their component?

Thirdly, stopping short of subsidies, actual provincial cash subsidies, what better way is there? How can we be equal to that, to shipbuilding in other countries?

I see it was the Jones Act, not the Monroe Act. I think I got that wrong. “Jones”, like “Smith”, is a prevalent name, and you sort of get mixed up sometimes.

Mr. Ken Epp (Elk Island, Canadian Alliance): Jones, Smiths, Monroes... they're all the same.

Mr. Gérard Lalonde: I thought the Monroe doctrine had something to do with manifest destiny. I was a little confused on that. But yes, in regard to Davy Jones there, we all know what he's about.

You mentioned that you come from Welland. I wish Roger Gallaway were here, because I could tell him about how I come from Sarnia and—

Mr. Gary Pillitteri: I come from Niagara-on-the-Lake, Niagara Falls.

Mr. Gérard Lalonde: As I say, I could tell him that I come from Sarnia, and I used to watch the big boats come by, the lakers. They truly are amazing. I do have a soft spot in my heart, as do you, for ships.

But my point here today isn't to address the issue as to whether assistance should or should not be given to the Canadian shipbuilding industry. That's for minds better than mine, and we would leave that issue to be carried in the main by Industry Canada. I understand that they're consulting with the industry, as we speak, on issues of concern to the industry, as they said they would be doing.

The point I hope to make today is that once a government has decided whether or not to provide assistance to an industry, there are a variety of mechanisms open to the government to do so. If they've decided not to provide assistance, that's the end of the story. But if they've decided to provide assistance, presumably you have to decide how much, and then how best to deliver it.

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The point I'm trying to make is that investment tax credits are not without some warts as compared to grants. Quite clearly, tax credits are the preferred mechanism when you're doing something like I mentioned earlier, a demi-grant. Grants may be preferred in those situations where you're dealing either with a small number of players or with an amorphous base. Tax credits are best where you're dealing with a large number of players and a base that is clearly determined.

You had asked about U.S. trade barriers and the Jones Act. Again, those are really issues that go best to the trade people and the industry people. I'm a tax policy word merchant from the Department of Finance, and what I would prefer to do today is to try to point out some of the benefits and some of the costs in providing assistance through the tax system.

The Acting Chair (Mr. Paul Szabo): Thank you.

Mr. Epp.

Mr. Ken Epp: Thank you very much.

I regret getting here late, but while I was listening to the other conversation I scanned your report, and I presume that what you gave verbally was close to what we have in the written copy here.

I have a couple of questions. First of all, we're told that Korea and Japan have a big part of the market in shipbuilding, and one of the reasons is that they are very heavily subsidized. So why should we in Canada worry about the appearance of subsidies through tax credits or other mechanisms and be concerned about a tax on the international trade market and having to go and defend these things as being subsidies, when they seem to be getting away with it and killing our industry?

Mr. Gérard Lalonde: Again, on the trade issues, I understand you've had trade people here testifying to the committee. I'm not really qualified to answer the trade issues.

You've posed the question, why should we be concerned about the perception of providing tax incentives? The point I'm trying to make today is that it's up to the government first to decide whether they want to provide assistance, and if they do, to take a good close look at the various mechanisms you can use to do it. Tax credits aren't necessarily the best.

The reason tax credits aren't necessarily the best is because they're not subject to discretion. You have to run off a code, and if you're in the code, you're in, and if you're not in, you're not. We can discuss examples, if you like, of where both of those things have happened and either denied taxpayers a benefit or cost the government.

The other thing is that the timing is kind of odd. For those corporations that are not taxable, you get to wait a long time to see your cheque. For those that are fully taxable and need the cashflow the least, you get to see the cashflow benefit right away, because you can reduce your corporate tax instalments.

Mr. Ken Epp: Right.

Again, we're talking about the tax considerations, and one of the things that's happening in the shipbuilding industry is a lot of research, both in better ways of manufacturing ships and also in the better design of ships and the various accoutrements that are added to the ship.

Do you feel that using tax credits for that type of activity is stimulating to both that particular sector of the economy and to the economy in general, or does taking tax money away from ordinary taxpayers and giving it to these depress the economy?

I don't know, maybe Mr. Morrison is more geared up on that, since he calls himself an economist.

Mr. Bob Morrison (Senior Tax Policy Officer, Tax Policy Branch, Business Income Tax Division, Economic Development, Department of Finance Canada): Thank you.

I think the department carried out a study a few years ago evaluating the scientific research and experimental development tax credit program and found it to be, in general, effective, because it provided support to industry to do research and development in combination with other programs the government delivers in that area.

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One of the reasons that scientific research and experimental development support is provided is for the externalities that research and development are generally considered to provide to the economy. There are spinoffs, which other taxpayers that aren't really part of the transaction benefit from.

One of the highlights of the SR and ED program, or one of the reasons this support is delivered, at least partially, through a tax credit credit is the fact that in advance, you really cannot identify who is doing R and D. It could be any taxpayer, any corporation out there. Many taxpayers are doing R and D. Therefore because it's more broad and there are many taxpayers doing it, it's maybe more efficient to provide a tax credit regime for this program.

In terms of providing a tax credit to shipbuilders, there are relatively few identifiable shipbuilders in Canada who would qualify for such a credit. Therefore, it might be best to deliver the mechanism for delivery of the support, if it's considered necessary, outside of the tax system.

Mr. Ken Epp: I have a further question. With respect to the capital cost allowance you talked about, this bill talks about a more favourable tax regime on leasing agreements, whereas you are emphasizing the fact that we have the accelerated capital cost allowance on ships. Presumably those are ships that are registered in Canada and the people owning them are paying Canadian taxes. I have two questions on that.

First, are there similar schemes in other countries? Are we ahead of the game on that or are we behind? Secondly, is there any empirical evidence that this in any way encourages Canadians to get their shipbuilding, either retrofits or whatever it is, done in Canada? If they were to take that business to another foreign country, do they not get those same credits anyway when they register their ship in Canada?

Mr. Bob Morrison: The accelerated capital cost allowance is basically a 33 1/3% straight-line right off, but with the half-year rule it's over four years. In order for a company to be able to make that right off, it has to be a Canadian built ship or retrofitted in Canada and it has to be a Canadian taxpayer.

Mr. Ken Epp: Oh, okay.

Mr. Bob Morrison: If they buy a foreign ship or have work done in a foreign country, they would be eligible for the 15% diminishing balance right off.

Mr. Ken Epp: So there is an immediate incentive for a Canadian company to get their shipbuilding stuff done in Canada.

Mr. Bob Morrison: Yes. Just to give you an idea—

Mr. Ken Epp: I know this is out of your area, but isn't that now countervailable?

Mr. Bob Morrison: I'm not an expert in the intricacies of the WTO, but if it's considered to be support, my understanding is that... I'm not sure whether it's exporters, whether the support has to be to people exporting to another country. In order to be eligible for the accelerated CCA, you have to be basically a Canadian taxpayer buying a Canadian ship. So the transaction is internal. I'm not sure about that exactly.

Mr. Ken Epp: Okay.

Mr. Bob Morrison: I just want to give you an idea of the magnitude of that support or what the accelerated CCA would generate. On a $100,000 investment, for example, basically the present value of the tax, being able to write that off much faster—that is, 33 1/3% versus the 15%—is about $5,800 a year federally. That's about 5.8% of the cost. If you combine provincial taxes into that, you're probably approaching 8% to 9% of the cost. As I think we mentioned earlier, it's equivalent to a 13% investment tax credit.

Mr. Ken Epp: Do other countries do the same thing?

Mr. Bob Morrison: I'm not familiar with the details of what other countries provide in support of shipbuilders through their income tax regime, other than the U.S. They don't provide any special incentives that I'm aware of. They do have a depreciation regime that is slightly more generous than our regular 15% regime.

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Mr. Ken Epp: It's 11, right?

Mr. Bob Morrison: They allow it to be written off over 11 years. It's a combination of straight-line diminishing balance, which would equate to approximately the same value as a 20% diminishing balance right here in Canada. So it's more generous than the 15%, but not as generous as the 33 1/3% straight line that we provide for Canadian-built ships.

Mr. Ken Epp: Mr. Chairman, in terms of what I have heard, I'm not sure that this bill we have before us gives us any advantage over what we have now. That's my opinion. I need more information to have my mind changed from that. Thank you.

The Chair: I'm sure there will be plenty of information for summer reading on this bill.

Paul Szabo and then Mr. Dubé. Is that okay?

[Translation]

Mr. Antoine Dubé: It's okay.

[English]

Mr. Paul Szabo: Thank you.

I have a number of questions, and maybe we can do a fast round just to help us move this along. If it's not in your jurisdiction or if you don't know, just say so. Are you aware of any financial institution for which the federal government can guarantee preferred rates on financing?

Mr. Gérard Lalonde: That wouldn't be within our role in tax policy.

Mr. Paul Szabo: Okay. Your testimony was basically that the lease financing benefit and the refundable credit possibly could achieve benefits. Have you read the act? Could you tell me how much the refundable tax credit is?

Mr. Gérard Lalonde: No, because the act doesn't stipulate any particular rate, nor does it indicate what exact relief from the lease and property rules would be required.

Mr. Paul Szabo: I noticed that. So if this passed... Clause 5 says that “the Governor in Council”, which is the cabinet, “shall make the regulations required to amend any Act of Parliament or Regulation in order to implement the purpose of this act.” It basically says cabinet should do something to implement a refundable tax credit for whatever amount it thinks is appropriate. “We're not going to tell you what amount it is. You're going to have to figure that out yourself.” This seems a little bit unusual to me. Is this unusual to you?

Mr. Gérard Lalonde: Yes. Usually in order to create an investment tax credit, you would have to amend the Income Tax Act to implement the investment tax credit, and there's no provision to do that by regulation.

Mr. Paul Szabo: Right. So to amend an act you need to raise an act.

Mr. Gérard Lalonde: I would think so. You have to indicate in the act what has to be done.

On the leasing rules, those are done by regulation. There are regulations under the Income Tax Act, and that would be possible.

Mr. Paul Szabo: The refundable tax credit has two elements to it. It proposes that in the event that there is a shipowner for construction of a Canadian ship—I assume it would be for a Canadian purchaser—the refundable tax credit would be for the benefit of the purchaser or owner in Canada. However, where it was a foreign ship being constructed or refitted, the refundable tax credit would be for the benefit of the shipbuilder.

Is it possible to give a refundable tax credit on construction of a ship to the shipbuilder as opposed to the purchaser of a ship?

Mr. Gérard Lalonde: Depending on how you design the base, you could create an investment tax credit that ran off the cost of constructing the ship to the vendor and then create a different tax credit that would apply if the credit were to go to the purchaser and presumably run off the purchase price.

Mr. Paul Szabo: Do you know what the Canada account is?

Mr. Gérard Lalonde: The Canada account? No.

Mr. Paul Szabo: The Export Development Corporation was before us. I'm advised—and you may want to confirm this if you're aware—that the act of Parliament creating the Export Development Corporation prescribes that it operate on commercial terms. If the government wants to do something not on commercial terms but to give a special deal, it can do it through the so-called Canada account, where the Government of Canada would personally take the risk and top up or take care of the variance from commercial terms and conditions and rates.

• 1620

But I understand, and we may have to get this from other parties, Mr. Chairman, that the Canada account is restricted for very specific, certain types of guarantees or activity. I believe it's international and quite restricted.

The reason I asked you the first question earlier, about whether there are any financial institutions, is it appears to me... Maybe you can confirm this. Can the Government of Canada legislate one of our charter banks to give preferred rates to shipbuilders?

Mr. Gérard Lalonde: My testimony is restricted to income tax matters. I'm from the tax legislation division, Department of Finance.

I'm aware that there are things like student loans, where there is an arrangement between the Canadian government and the banks. But I'm not aware of that in my capacity as a person from tax policy.

Mr. Paul Szabo: Okay.

The last item here, and I guess you're still in the Department of Finance, and you're still familiar with certain legislation... The last provision in this bill says cabinet shall not make regulations amending or repealing any of the regulations made in this act, ever. Have you ever seen anything where a bill says after I put my stuff in you can't touch it, ever?

Mr. Gérard Lalonde: I would have thought that would be improperly constraining the discretion of future Parliaments to do as they please in the concept of parliamentary supremacy.

Mr. Paul Szabo: Thank you, Mr. Chairman.

The Chair: Thank you, Mr. Szabo.

We're going to go to Monsieur Dubé.

[Translation]

Mr. Antoine Dubé: It is perhaps because of the translation, but I would like to return to something that was raised by Mr. Szabo. In clause 3(1)(b) of the French version, it says: “by amending the provisions of the Income Tax Act”, and clause 3(1)(c), deals with amending “the provisions of the Income Tax Act and the Income Tax Regulations to allow a refundable tax credit”.

This type of provision exists in both cases. You might have missed them, but they do exist. Maybe Mr. Szabo does not like the wording, but it is there. Now, you answered that there was nothing in the bill that would amend the Income Tax Act. I have just cited two examples where it states that it can be done: clauses 3(1)(b) and 3(1)(c). Have you read them?

[English]

Mr. Gérard Lalonde: Is your question posed to Mr. Szabo or to me? I have seen the legislation.

Mr. Paul Szabo: Maybe, if I may, I'll just try to simplify what I think is the problem here. It is that subclause 5.(1) says the Governor in Council shall make regulations. And the Governor in Council does make regulations to legislation to change from time to time. But the Governor in Council cannot make regulations that amend an act. The only way you can amend an act is to bring forward a new act, and it would be an act to amend an existing act.

So the Governor in Council cannot do this and therefore this bill doesn't work.

[Translation]

Mr. Antoine Dubé: I don't want to enter into a debate on that today, but I would like to make something clear because, according to the witness, there are no provisions in the bill that would amend the Income Tax Act. I simply wanted to point out that there are two such provisions.

As to clause 5(1), I respect your opinion, but I am not a legal expert. I will leave that to them. I simply wanted to point out that there are two clauses in the bill that provide for the amendment of other acts.

As to the reason why I drafted it in that way on the advice of my legislative counsel, who could not be here today because he is on extended sick leave, I would answer that an opposition member can not be any clearer. If the bill had been introduced by the government, there would have been specific items, amounts, etc., but since this is a private member's bill introduced by an opposition member—this comes under the House Committee on Procedure and House Affairs—it could not have been votable had it included such specific measures. That is the reason why it is drafted in this way. That is what I was told by the Committee on Procedure and House Affairs. It was accepted by the committee, but had I been more specific, had I attempted to amend regulations, I would have gone beyond my role as a member and the bill would not have been accepted.

• 1625

If I am told that in order to correct that, Mr. Szabo, who is a government member, is moving this motion, I would support it, but I don't want the bill to be destroyed on a simple technicality. I might remind you that on second reading, you voted in favour of the bill because you wanted to help the shipbuilding industry.

I will move on to another question. The people from the Shipbuilding Association of Canada...

[English]

Mr. Paul Szabo: Mr. Chairman, I accept what the member said. I also accept the fact that the House passed this bill at second reading on the principle—which is articulated in clause 1—of helping the shipbuilding industry to be more competitive.

The bill was not passed at second reading with regard to the specific clauses we received as testimony. This is where I think we're going to have the problem—and I hope we're going to address this.

The real problem is that the bill has some technical problems that may make it unworkable. If the Governor in Council cannot amend the Income Tax Act, then this bill doesn't work and it's moot. You might as well just throw it away.

In fact, this bill—and I think I made the comment the very first day we had hearings—is written like a motion: that the government help the shipbuilding industry by bringing in tax credits and other things that will help to make it more competitive. But it doesn't specify how much the credit should be or to what extent the leasing provisions should be changed, or capital cost allowance. It also specifies that we have to help it on the financing side, but I can't find anybody who can confirm to me what institution we have jurisdiction over that we could legislate to give preferred rates to shipbuilders. They don't exist. There is no institution in Canada right now that the government could legislate and control in terms of what rates they charge, not even the Export Development Corporation. It's against the act that created it.

This is where we have a problem, Mr. Dubé. You suggest it would be terrible if for technical reasons we didn't do this bill. In fact, that's precisely the problem.

This bill was passed by the House, and I'm not challenging the House's opinion with regard to the importance of dealing with shipbuilding. I'm here, though, and it's this committee's job, to see whether or not the bill can deliver. Quite frankly, on virtually every clause there is a problem technically, and I'm not sure whether there's a way we can fix it.

So the problem here is technical, it's not shipbuilding. It's technical, and it's part of the bill. This what we have to address, and I hope we're going to be able to work something out here.

[Translation]

Mr. Antoine Dubé: I greatly respect both Mr. Szabo himself and his seriously considered opinions, but I believe we could do this at some other time, during the clause-by-clause study. We could then ask for some help. In any case, the way things are going, we will have all summer for someone to help us.

Our witnesses have just answered that their expertise is in the area of finance. The loan guarantee programs relate more closely to the industry itself, and they were questioned on that on another occasion. Moreover, Mr. Lalonde, your brief involves two specific measures: the tax credit and amortization.

I did not simply pull the provisions in this bill out of a hat; they reflect what has been demanded by the people in the Shipbuilding Association of Canada, which represents the owners, the unions that are supporting the demands of the owners, as well as all of the provincial premiers and governments, including Mr. Lord, who, just recently, questioned Mr. Manley. Therefore, I believe this is a very legitimate question for me to ask.

Other countries that have shipbuilding industries and with whom we compete have protectionist measures and grant large-scale tax breaks, which attract business from Canadian shipping companies. We must correct that situation.

I suggested two tax measures that would help. These measures also involve another dimension since they would encourage shipbuilding in our own shipyards, which would allow us to keep the jobs here and to create more of them. Finally, we would be bringing back personal income tax dollars.

• 1630

Has anyone in the Department of Finance examined the impact that would be felt with the loss of these jobs: the impact of the status quo where the present number of workers would be maintained, and the impact of the measures that I am suggesting and which, according to those who work in the shipbuilding industry, would mean 1,000 to 1,500 well-paid jobs, that would generate enough taxes to cover practically all the costs related to these measures? Have you evaluated the impacts of these possible scenarios?

[English]

Mr. Gérard Lalonde: Again, the point I would like to make is not so much whether assistance is warranted to the particular industry; that's not my role. We had people from Industry Canada here to talk about the state of the industry, the jobs in the industry, and the fluctuations in levels of employment.

The upshot of your bill is that we should provide assistance to the shipbuilding industry, and it proposes these particular ways of doing that. What I would like to point out is that the particular ways that have been selected may not be the best, and there's no indication that other mechanisms have been canvassed. That's my point.

For example, I know you've talked to the industry. I know you've talked to the unions. I was sitting here when they were testifying. It's quite clear that all those people who testified are in favour of providing assistance to the industry. What's not clear is why other mechanisms have been overlooked in terms of providing that assistance.

If you use the tax system, you're stuck with the tax system. And as I mentioned earlier, that has a variety of impacts. If you look in the last budget, you'll see that even the scientific research and experimental development tax credit is having a little bit of trouble. We're having a bit of trouble with internal software and whether that should be eligible for scientific research or not, and that's a problem in the base.

If you look back in the tax cases, you'll see that there were some very costly tax cases in the context of the special investment tax credit, and there again, it was a problem with the base, in that there was a group that, from a policy perspective, we didn't think should have had access to the credit, and they did.

So the point isn't so much about the merits of the policy beyond your bill. I'm not here to discuss that. What I'm here to talk about is the merits of the particular mechanisms that have been chosen through the tax system, one being the use of a tax credit as opposed to some other direct assistance mechanism, and the second being the downside of doing away with the leasing-loss rules and the specified lease and property rules—which were put in for a reason. The reason they were put in was to maintain the integrity of the tax system in the eyes of all those other Canadians who don't like to see profitable corporations paying no tax or the annual list of high-income taxpayers who don't pay tax.

[Translation]

Mr. Antoine Dubé: But a great number of Canadians and Quebeckers are asking questions and they are not satisfied with the present situation. Canadian shipping companies are having their vessels built in countries that grant complete tax shelters, where there is no tax supervision whatsoever and where the employees don't even pay income tax. There are all kinds of measures available. Should Canada, whose Minister of Finance is President of the Group of Twenty, not show some leadership in studying taxation in other countries where the measures make no sense? We are denouncing the fact that our foreign competitors are not subject to the same conditions.

If my suggestion is not the best one, then what is? Do you not think that a direct subsidy would cause fewer problems? The federal government helps certain sectors and subsidizes a great number of activities. I would like to take advantage of your expertise and ask you what other means might be considered if the two that I have suggested are not acceptable.

If there are no other possibilities, we will simply have to shut down our shipyards, as has already been done at Saint John Shipbuilding. If all Canadian shipyards were to close tomorrow morning, we would be in big trouble. We could not even have our own ships or foreign ships repaired. People would avoid coming here, they would dock in the port of New York and they would send the shipments on by train or by some other means. We must be aware of that. What are the other solutions? If the tax credits and amortization are not applicable, what other measures might we resort to? The situation as it now stands is intolerable. Everyone is closing down. There were 12,000 jobs in 1993, there are now only 2,500 left and their numbers are dwindling on a monthly basis. Are we going to let this continue much longer?

• 1635

I would like to take this opportunity to express my disappointment, Mr. Chairman. We had intended to proceed to the clause-by-clause study on June 7. During the last meeting, we accepted Mr. Szabo's suggestion and called the civil servants to appear. The officials from the Department of Finance were not available then and they are here now, on the last sitting day. How should a fellow like myself interpret that? I am starting to realize that no alternatives are being offered. There was political will to adopt the bill in second reading, but I am told that the provisions do not represent the best solution. Do you have any better ones to suggest? Do I take it that you do not have the authority to find anything better?

[English]

Mr. Gérard Lalonde: First, you had mentioned some of the political aspects here. I'm not a politician, which is probably quite clear in the way I deliver my comments, quite long-winded.

First off, and I think I mentioned this before, it's imperative that the government, in the context of something like this, determine that, yes, they do want to provide assistance. That is a role on which the Industry Canada people I think have taken the lead. I wouldn't want to comment on where they're going in that particular direction.

Whether there are better ways of delivering assistance once you've decided to do so—in my view, yes. One of the ways might be to reduce taxes overall in Canada for everybody and make the whole economy in Canada more open and more competitive. That's something that's been opened up in the 2000 budget, where the government has proposed to reduce overall levels of corporate taxation over the next five years both for corporations and for individuals. Quite clearly, that will help everybody.

To the extent that you start delivering incentives in any particular area, the costs go up and it makes it more difficult to do across-the-board incentives. But in regard to that, if it's decided by the government that, yes, assistance is desired and there's a budget for it and they decide how much they're going to deliver, then you have to look at how you are going to deliver it. Your bill proposes to do it through a couple of tax measures and the loan support program.

There are grant programs and there have been grant programs. That's one way to deliver assistance to industry. There have also been programs that deliver low or no interest rate financing, repayable loans but with conditions attached. There is a variety of mechanisms that have been put in place in the past, and they all have their advantages and disadvantages. I've tried to describe some of the disadvantages with the tax system. Quite clearly, I see from my perspective the tax system not being the best way to deliver incentives.

The people who have approached you have opted for the tax system, and they may have their reasons. If you deliver assistance through the tax system, for example, nobody need know that you ever got it, because taxpayer information is confidential and Revenue Canada can't indicate whether you did or did not get a tax credit. That may be desirable for some potential recipients of assistance. I don't know.

On the other hand, if you get a grant and it's out there in the books of the government that this much money as a grant was delivered to such and such a corporation, if your point of view is that one ought to promote transparency in government, then that's probably a good thing. If your point of view is that for the government of the day, or a future government, or the opposition party, it might be uncomfortable if it were in the newspapers, that's a different issue.

• 1640

The Chair: I think you've answered your question, Mr. Lalonde.

Final questions, Mr. Dubé. Then we'll go to Mr. Cullen and then we'll end up with Mr. Epp.

[Translation]

Mr. Antoine Dubé: The tax credit that I am suggesting is more of an incentive or a selling point that can be used by a shipbuilder in bidding on the construction of an oil rig or a ship. Because of the rise in the price of oil, the oil drilling industry is becoming more and more lucrative. The incentive can be accounted for and anticipated. When a shipbuilder knows before making a proposal that he will be eligible and that the policy is well established, he might have more room to be competitive. The people who work in the shipbuilding industry have told us that things had become tighter because of the crisis in Asia. The gap between Europe and Canada is getting smaller and a number of European countries have managed to become competitive. It is therefore very important for our shipbuilders to be able to invoke this argument and to know when they submit a bid, what margins are available to them. When a ship costs $100 million, even 3% can count. This allows us to create employment, and more shipbuilding, which has a positive effect on the economy. Moreover, the tax credit is given after the work has been done. Even though a subsidy might be more visible and more transparent, it is granted before the work is done and there could be a loss of control. I do not want to engage in demagogy, but I might draw a parallel with the debate taking place at this time on the HRDC subsidies. We tried to determine if the grant recipients had used the money for the stated purposes. A tax credit seems to be advantageous because it acts as an incentive, because it creates jobs and because the government can exercise some control through very specific legislative measures. That's where I see an advantage. What do you think?

[English]

Mr. Gérard Lalonde: It strikes me that there's probably no grant that can't be recast as a tax credit and vice versa. For example, you take your example if you were to apply an x percent investment tax credit in respect of the cost of constructing a Canadian-built vessel. So the Canadian shipbuilder can, when they're doing their bids, know that Revenue Canada is going to deliver to them a cheque of x percent of the cost of that vessel, regardless of whether they're in a taxable position or not a taxable position, because you're looking for a refundable tax credit. So they know that a cheque is going to come from Revenue Canada for that percentage of the cost of the ship.

They also know they're not going to get that credit until such time as they file their return and claim it. Revenue Canada may or may not audit at that point. Probably not. In some subsequent year up to, depending on the size of the corporation, four years later, they may come along and audit and reassess, vary that credit, take it away, potentially increase it. In that context, it's a credit that is audited.

From a structural point of view, it's no different from a grant program under which the grant would be delivered to a shipbuilder on receipt of information detailing the cost they had incurred in producing the ship, and that was conditional on whoever it is who delivers the grant auditing later on that those costs were actually incurred.

It's simply a question of who delivers it. Is it Revenue Canada who delivers it through the tax system, or is it some other agency that delivers it more directly? There are some advantages and some disadvantages.

• 1645

For example, if it were a grant mechanism... And it's not up to me to decide, again, the basic question of whether assistance is decided to be delivered by the government or not, but if it were, you do have other options or avenues open to you. You can provide periodic payments during the construction period where the tax system doesn't accommodate that. That might be very helpful in meeting payroll and a variety of things.

You can lengthen the audit period, if appropriate. You can constrain it, if appropriate. You're not stuck with the tax rules. In the tax system, you're stuck with the tax rules. You're also stuck with the situation of the base. If we define the base to be a ship of a certain tonnage, and somebody's building a ship that happens to be two tonnes less, too bad. If it's two tonnes more, you're in.

It's not an ideal system, whereas if you have a mechanism where there's some discretion that can be applied, in my view it's a better system. And obviously I have a point of view, but that's what I was asked to bring to the table today.

The Chair: Thank you, Mr. Dubé.

Mr. Cullen.

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

Thank you, Mr. Lalonde, Mr. Morrison.

First of all, I'd like to say, certainly from my own point of view, Mr. Dubé, that what you're trying to accomplish I'm sure is very sincere. I know you're trying to save an important industry in your riding, and jobs, and this is an important issue for you—indeed, for all Canadians. So I want to put that on the record.

In terms of this particular bill, Mr. Lalonde, you know that in the Department of Finance we look at a whole range of tax proposals. And estimates are derived in terms of if we implemented these tax policies this would be a tax expenditure in the range of x to y, depending on the take-up, etc.

I know there are provisions in here that are not strictly tax policy issues, but would you be able to cost or give an estimate of the cost of this bill?

Mr. Gérard Lalonde: This particular bill? No, given that the credit rate is not stated and the particular amendments to the leasing property rules are not indicated, other than that they be relieving.

Mr. Roy Cullen: Okay. So if this Parliament passed this bill, we would not really know what sort of range of cost or tax expenditures we'd be committing ourselves to as a Parliament. Is that correct?

Mr. Gérard Lalonde: Yes. You could probably constrain yourself to a realistic range. You're probably not going to give a tax credit in excess of 100%—there's that. But other than it would be—

Mr. Roy Cullen: It would be as big a range as you could drive a truck through, really.

Mr. Paul Szabo: Or a ship.

Mr. Roy Cullen: This bill, in my mind—and I'm not a procedural guru by any stretch—seems to me to involve a tax expenditure, and the tax expenditure is a money bill, to my knowledge. The Speaker or the legislative counsel may not agree with that interpretation.

However, let's assume for the moment that it isn't a money bill. I would like to pick up on Mr. Szabo's point, but maybe from a slightly different tack. Presumably legislative counsel has said that to get around the fact that you don't want it to be considered a money bill you have to leave some of these things open, which creates the other dilemma: that we don't really know what we're dealing with.

But let's say that you had the act passed, so now it goes to the cabinet to determine what the investment refundable tax credit will be and also the detailed provisions of the leasing arrangements. So you have a bill that was passed by Parliament, which now comes to cabinet, which for various reasons may or may not support the bill. So they're left in a position of having to define regulations for a bill they might support, but they might not.

So it would be a challenging position for them to be in. Ostensibly they could say that the refundable investment tax credit would be zero and the leasing arrangements would provide no benefit. I'm being facetious, but I'm trying to point out the dilemma, even if you got around the point Mr. Szabo raised.

• 1650

I understand that the finance department officials here are from the tax policy branch, but there is this guarantee program in your bill. I don't know if we've had an answer yet from the finance department—there's a similar program, I understand, in the United States—on what the take-up has been and the cost of any guarantees that have had to be exercised to make up for defaulted loans. It might be something we could ask other officials in the department, to find out what the experience has been in other jurisdictions, particularly the U.S., for a similar comparable program. It seems to me that would form part of a cost consideration as well. What would the cost exposure be on the guarantee side?

Mr. Morrison, you're from the economic development division. Looking at this bill, if I were in the shipbuilding industry, recognizing that all the provisions haven't been spelled out, this would be quite an attractive package. Would that be correct?

Mr. Bob Morrison: I think the shipbuilding association, over the last two and a half years, has made several proposals along the lines of what this bill is proposing in the areas of leasing and refundable tax credits. In discussions we've had with them, and possibly in written submissions, they have suggested a tax credit somewhere along the lines of the same range of support Quebec provides, which is a sliding scale based on a series of ships.

Industry Canada provided the following assumptions some time ago. If we were to assume a 15% tax credit, on average, that resulted in $350 million worth of additional work done in a year—Industry Canada has indicated to me that's about half the shipbuilding capacity in Canada—it would generally cost about $50 million. But that type of tax credit would reduce the price of a ship to a purchaser by 15%.

If you were looking at the leasing side, again making some generous assumptions as to who might take advantage of the relaxed releasing restrictions, assuming that the lessor was fully taxable in every year and that kind of thing, the costs could be somewhat higher, in the $60 million to $90 million range. Again these are based very much on take-up rate—sort of in the 50%, 60%, 70%, take-up rate based on capacity.

Very simplistic models we ran on the leasing restrictions suggested the leasing restriction might reduce the price of the lease payment—which is how the incentive would be delivered to the ship operator, thereby encouraging him to buy more ships—by 10% to 15%. Between the two you would be looking at up to a 30% reduction in the price of the ship, which might therefore make it much more attractive to build ships in Canada.

Mr. Roy Cullen: Right. That deals with leasing and a refundable investment tax credit, but it doesn't deal with the guarantee, which you don't have data on, I understand.

Mr. Bob Morrison: I'm not familiar with that.

Mr. Roy Cullen: Let's say this act goes through the way it is, and the tax credit and leasing provisions are finally determined to be along the lines you've just described. I know many industries come to the Department of Finance all the time with all sorts of ideas on how to encourage their industries. Would you say, if this passed in some form, other sectors would want similar treatment? Is that likely?

Mr. Bob Morrison: That's very likely. Various sectors and industries are always asking for very specific support, for very good reasons.

• 1655

Mr. Roy Cullen: Sure. So that brings us back to the point that if Parliament were to approve this bill, it would logically seem that the Parliament of Canada had some feeling that shipbuilding was a priority. As a government we would have to say we're doing this for shipbuilding, but we're not going to do it for other sectors that come back later and say they want the same provisions. Or if we decide to allow other sectors the same provisions, that will have a cost implication as well.

Mr. Bob Morrison: True.

Mr. Roy Cullen: This is a technical issue, and I'm not a guru, but if a bill involves tax expenditure—which this generally does, although it hasn't been fleshed out that way—then to me it's a money bill. The House will have to decide if it's a money bill or not.

I guess those are really all the comments or questions I have, Mr. Chair. Thank you.

The Chair: Thank you very much, Mr. Cullen.

The final question is to Mr. Epp.

Mr. Ken Epp: I'm sure Mr. Cullen would resist this, but I was going to say that great minds think alike, since he asked almost exactly the question I was interested in.

I have one further follow-up on it. In a sense, these tax credits and others are only an expenditure to the government if the economic activity takes place. In other words, if a shipbuilding company doesn't build a ship, it doesn't cost the government anything; but if they build the ship, the government gets some revenue and then the tax credits reduce that revenue. Am I right on that?

Mr. Bob Morrison: If in fact you provide a tax credit or some other support and nothing happens, it's probably true—

Mr. Ken Epp: It's neutral.

Mr. Bob Morrison: —there is no cost to it. If, however, an activity does take place, you have to consider what other resources and sectors have been affected by it. You may just be shifting people who are employed in other areas, or taking money that would have been used in other areas, and moving them into the shipbuilding area or the industry to which you want to provide support. There may be costs in reduced profits and reduced activity in other areas.

Mr. Ken Epp: But if these people came from the ranks of the unemployed, you certainly couldn't argue that.

Mr. Bob Morrison: You would generally be assuming these were non-utilized resources that you were applying, yes.

Mr. Ken Epp: I think that's the case, and Mr. Dubé will probably correct me if I'm wrong. I think one of his reasons for bringing this bill forward is because our Canadian shipbuilding companies are operating so much under capacity. Their people have been laid off, and that has of course generated a lot of unemployment costs. If we were to employ those people again it would generate revenue, in terms of their own personal income taxes and personal payments into the EI system.

Once you start this ball rolling, how do you ever stop it from going into all of the other industries? It's a really radical way to think, but maybe we ought to reduce taxes so substantially to businesses that we become competitive internationally, our people are working, and the money is rolling in, instead of us worrying about expenditures to the government when this happens.

Mr. Bob Morrison: I think that's one of the messages from the most recent budget. On the corporate side, the government announced its intention to reduce the corporate tax from 28% to roughly 21% over the next four or five years. It's a very general way of addressing that.

Mr. Ken Epp: I did a quick calculation per $1 million of ship construction. If we look at the depreciation... Unfortunately, I've never been involved in a big company, so I don't know what the large corporate tax rate is. I used 24%. Am I close?

Mr. Bob Morrison: For large corporations it's 29% federally, and it varies provincially, but you could average 42% to 43% at this point.

• 1700

Mr. Ken Epp: Really?

Mr. Bob Morrison: That's right now, but it's coming down.

Mr. Ken Epp: Okay. I used the tax rate of 24%, and at that, for every $1 million, if you use the four-year depreciation, there's $240,000 in tax savings at 24%, so it would be $290,000 per $1 million at 29%. Immediately, if you use that depreciation, if that ship is built in Atlantic Canada, there's another 10%, so that's another $100,000. So you land up with the government actually having reimbursed, so to speak, through the depreciation and through this investment tax credit, basically one-third of the cost of the ship. To me, that seems a fairly healthy incentive already.

So I'm curious as to why our shipbuilding industry in this country is languishing if the other countries are even doing better than that. Or is it just that their costs of production, their labour costs, and everything are that much lower? I don't know how much further we can go here, short of just saying okay, let's let the shipbuilders build whatever they can, employ whoever they can, and take the government right out of the loop, which of course, as I intimated before, would have a considerable precedent for every other business in the country. I'm sure they could all claim that—the car manufacturers, and Bombardier would want the break in building airplanes, and trains, and justifiably so.

Mr. Chairman, I think it would be an interesting curiosity for us to actually study what a massive corporate tax rate cut would do in this country in all of those sectors. I have an idea that it would just turn this country upside down. But I'm not an economist; I'm not a theorist. Maybe there is a limitation.

Anyway, that's the end of my comment. If you want to give me any further feedback on it, I would appreciate it, but otherwise...

Mr. Bob Morrison: I have just one clarification. I answered your question about the top corporate tax rate, and then you proceeded to use that in the manufacturing sector. I should advise you that the manufacturing rate for all corporations is 21% to 22%.

Mr. Ken Epp: Okay. I used 24%.

Mr. Bob Morrison: The rate of 29% is for non-manufacturing corporations, but the intention, based on the budget announcement, is that everybody would be in that 21% to 22% range within five years.

The Chair: Do you have another question?

[Translation]

Mr. Antoine Dubé: I have a question for you, Mr. Chairman, and maybe one for the clerk.

The bill was examined in second reading at the end of March and we need time for the committee to draft its report. I think it was March 28. I would like to know what is the usual time frame. In fact, I would like to know how we will proceed. When must the Finance Committee report to Parliament? When will we proceed to the clause-by-clause study and table a report?

[English]

The Chair: I think it was some day in October, but we'll check. Is it 60 sitting days?

The Clerk of the Committee: I think it's 90.

The Chair: We'll double-check.

[Translation]

Mr. Antoine Dubé: The committee has 90 sitting days from the adoption of the bill in second reading.

[English]

The Chair: That's right.

[Translation]

Mr. Antoine Dubé: I came to the Finance Committee to ask that the study be speeded up. We can take 90 days, but we can also do it in only a few days. The government can decide to proceed more quickly. In any case, we must face the fact that the session will end this evening. Can we hope that the Finance Committee will pursue the matter if necessary? Can we hope that people will put their nose to the grindstone during the summer so as to answer any technical or evaluation questions, according to the scenario? Mr. Morrison has presented a scenario. We should ask the industry to do the same thing.

I might point out that today the Shipbuilding Association of Canada tabled excerpts from their brief. I think it will be coming in the next few days, but is there any way, Mr. Chairman, for the committee to ask various departments to submit the information in writing as soon as we reconvene?

• 1705

[English]

The Chair: The work of the committee does not stop when the House of Commons is in recess. For example, we'll be receiving briefs from various organizations and individual Canadians on pre-budget consultation and on the financial services sector reform throughout the summer. That's what we basically do as individuals, not as a committee: we read these briefs so that we're ready for the sitting in the fall.

The same thing applies to your bill. We will continue to try to seek... There are some technical issues Mr. Szabo brought to light that I personally will engage in to see if in fact what he's saying is correct, and to see if there are any ways of altering the bill to make it feasible for the members of the committee.

So you can rest assured that work will continue, and we can maintain contact throughout the summer.

[Translation]

Mr. Antoine Dubé: Mr. Chairman, I am not a regular member of the Finance Committee, but I can assure you that I am entirely at your disposal as of today so as to ensure that something will be done, so that we can have a follow-up.

[English]

The Chair: I don't think you should be waiting for a phone call for a committee meeting itself right in the summer. I don't think the committee will be meeting in the summer. We will be meeting in the fall when we come back. But that does not mean the researchers and I and others in the committee aren't doing work related to the finance committee, because we have to. It's the only way we can meet the challenges of the financial services sector package and pre-budget consultation. It's no different from the social security review of 1993, essentially.

Mr. Epp.

Mr. Ken Epp: To add to that, I don't want to discourage Mr. Dubé, but we're scheduled to be back here on September 18. That's when the House resumes. The October 23 election would require a writ dropped on September 17, the day before that.

The Chair: Which election is that? Is that the third ballot on the Alliance or something? Do you have some new candidates I don't know about?

Some hon. members: Oh, oh!

The Chair: Mr. Dubé, in all seriousness, I want to really thank you very much for bringing this to the attention of the committee. It's a concern of yours, and I think you've done an excellent job of presenting your case. We have some challenges with it. We'll have to deal with it. But I think you've done a great job, and we'll have to see how we can deal with it.

Mr. Antoine Dubé: Okay.

The Chair: In the summer, feel free to keep in touch.

[Translation]

Mr. Antoine Dubé: I am not familiar with the operations of this committee, but if, for example, a written evaluation or information were to become available to the committee, could the members and the sponsor of the bill be made aware of that fact and could we receive this information?

[English]

The Chair: Yes, absolutely.

[Translation]

Mr. Antoine Dubé: I will close in wishing...

[English]

The Chair: You know what? I treat you as a member of the finance committee on this particular bill—

[Translation]

Mr. Antoine Dubé: Of course.

[English]

The Chair: —because you've sat through every single meeting. The clerk and the researchers will be instructed to treat you as if you were a member. So any information we get, you will get. Is that a fair deal?

Mr. Antoine Dubé: Okay.

[Translation]

I would like to thank you for that and I am pleased that we have heard varying points of view. I think it is a simple question for the government: do we want to help the shipbuilding industry? Mr. Epp made a good comment and I will share it: since the government said, in the House on March 28 that it wants to help the shipbuilding industry, we must see whether this will be done before the elections. I will cooperate, but if the government acted in such a way as to prevent it passing before elections are called, even though I am normally very nice, I might change my tune. Thank you.

[English]

The Chair: Okay.

[Translation]

Mr. Antoine Dubé: Have a good summer.

• 1710

[English]

The Chair: Thanks for the warning.

Once again, Mr. Morrison and Mr. Lalonde, thank you very much for your input. This gave us an excellent overview. Thank you.

The meeting is adjourned.