I call this meeting to order. This is meeting number 77 of the House of Commons Standing Committee on Finance.
At our last meeting, I was unable to be here. I want to thank MP Hallan, our vice-chair, for chairing that meeting. I know it was an in camera meeting. From what I've heard, it was very collaborative, efficient and expedient, so I want to thank all members very much for all that hard work.
It's wonderful, at the start of 2023, to have Governor Macklem and Senior Deputy Governor Rogers joining us.
Pursuant to Standing Order 108(2) and the motion adopted on Monday, November 21, 2022, the committee is meeting, from 11:00 to 12:30, to discuss the Bank of Canada's report on monetary policy. Pursuant to Standing Order 108(2) and the motion adopted on Thursday, February 2, 2023, the committee is meeting with the Department of Finance, from 12:30 to 1:00, to discuss the Select Luxury Items Tax Act and Bill .
Today's meeting is taking place in a hybrid format, pursuant to the House order of June 23, 2022. Members are attending in person in the room and remotely using the Zoom application.
I'd like to make a few comments for the benefit of witnesses and members.
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To commence, we have with us the Governor of the Bank of Canada, Tiff Macklem.
Welcome, Mr. Macklem.
Joining Mr. Macklem is the senior deputy governor, Carolyn Rogers.
Welcome, Ms. Rogers.
Please go ahead with your opening remarks. The members will then look forward to asking you questions.
Good morning, committee members.
I am very pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy decision and the monetary policy report.
In January, we raised our policy interest rate by 25 basis points to 4.5%. We also said we expect to hold the policy rate at the current level, while we assess the impact of eight consecutive interest rate increases since March 2022. This is a conditional pause. It's conditional on economic developments evolving broadly in line with our forecast.
Since the last time we were with you, we've seen some evidence that our interest rate increases are starting to slow demand and rebalance our overheated economy. With inflation above 6%, we're still a long way from our 2% target. However, inflation is turning the corner. Monetary policy is working.
Before we take your questions, I’ll outline the impact our rate increases have had so far. Then I’ll explain what we expect to see this year. Finally, I will highlight some of the risks we face and how we will respond to ensure that inflation continues to come down and returns to our target.
Inflation in Canada has eased but remains high. Annual consumer price index, CPI, inflation moderated to 6.3% in December from its peak of 8.1% in June. So far, this easing mostly reflects lower prices for energy, particularly for gasoline.
With global supply chains improving and demand slowing here, at home, for big-ticket items that people often buy on credit, price increases for durable goods have also moderated. Prices for food and many services, however, are continuing to rise much too quickly. The Canadian economy remains overheated and clearly in excess demand, and this continues to put upward pressure on many domestic prices.
A broad range of labour market indicators have shown only modest signs of easing. Job vacancies have come down a little but remain elevated, the unemployment rate is near historical lows, and many businesses continue to report labour shortages.
Overall, the restrictive stance of monetary policy is helping to rebalance demand and supply. Household spending is slowing, particularly for goods sensitive to interest rates like housing and furniture. More broadly, consumption growth appears to have weakened considerably in the second half of 2022. Some of this slowdown reflects the waning boost from the reopening of the economy, but higher interest rates have contributed.
We know that it takes time for higher interest rates to work through the economy to slow demand and reduce inflation. That's why monetary policy needs to be forward looking. Guided by what we've seen so far and our outlook for economic growth and inflation, we think it's time to pause interest rate hikes and assess whether monetary policy is restrictive enough to return inflation to the 2% target.
If economic developments are broadly in line with our forecast and inflation comes down as predicted, we shouldn't need to raise interest rates further, but, if evidence begins to accumulate to show that inflation is not declining in line with our forecast, we are prepared to raise our policy rate further.
In our January outlook, we expected economic growth to be close to zero for the first three quarters of the year. With growth and demand stalled, supply will catch up, and the economy will move from excess demand to modest excess supply. This will relieve inflationary pressures.
We expect CPI inflation to fall to around 3% in the middle of this year and reach the 2% target in 2024. We've already seen a momentum shift in goods' prices. For inflation to get back to 2%, the effects of higher interest rates need to work through the economy and restrain spending enough for supply to catch up. The tightness in the labour market needs to ease, wage growth needs to moderate and service price inflation needs to cool. Inflation expectations will also need to come down, and businesses need to return to normal pricing behaviour.
If these things don't happen, inflation will get stuck above our 2% target, and additional monetary tightening will be required.
There are risks around our projection. Global energy prices could jump again, pushing inflation up around the world. Inflation expectations could remain elevated in Canada, or increases in labour costs could persist. Overall, we view the risks around our inflation forecast as balanced, but, with inflation still well above our target, we continue to be more concerned about upside risks.
I want to leave you with a few key messages.
The decline in inflation since the summer is welcome relief for many Canadians who are struggling to keep up with the rising cost of living, but, at more than 6%, inflation remains too high.
To fight inflation, the Bank of Canada responded forcefully, raising our policy interest rate from 0.25% a year ago to 4.5% today. That is working to reduce demand and rebalance the economy. We're still a long way from our inflation target, but recent developments have reinforced our confidence that inflation is coming down. We are committed to getting inflation all the way back to the 2% target so Canadians can once again count on low, stable, predictable inflation and sustainable economic growth.
With that overview, the senior deputy governor and I would be pleased to take your questions. Thank you.
Thank you, Governor and Deputy Governor, for being here today.
Governor, in January's monitoring report, you indicated that upward pressure on prices stems from problems such as labour and difficulty sourcing goods such as building material or food, as you've highlighted today as well.
Would cancelling domestic policies such as the carbon tax, the escalator tax on excise duties and the luxury tax, which all have a negative impact on production, as we know, help to ease those supply issues?
I guess I could say a few things on supply issues.
Many of the supply issues that have affected particularly goods' prices are global in nature. They have certainly been more intense and more persistent than we had expected, but I am pleased to report that they are working their way out. You can see in the monetary policy report a number of graphs that show shipping costs and delivery times. They are looking, maybe not quite normal yet, but much more normal than they've looked for some time.
The other aspect of that is that we've seen the demand for goods, largely with the increases in interest rates, especially larger goods, things like houses, furniture and appliances, which people often buy on credit.... Those are some of the first places you see higher interest rates feeding through the economy. They've been slowing, so with slower demand and better supply, you have seen goods' prices roll over.
With respect to your specific questions about taxes and carbon taxes, those are built into our projection. Yes, they have effects. Those are built into our projection.
As I said, we really leave fiscal policy to governments and parliamentarians. We take it as given and then we do what we need to do.
Through the depths of the pandemic, the government had very expansionary fiscal policy. Monetary policy was also exceptionally expansionary. That was needed. We went through the deepest recession in history. The good news is that we've had the fastest recovery. We now are on the other side of that and we're dealing with the side effects from that.
Getting back to the previous question, we've built in government plans and those are built into our forecast. If there are new fiscal spending plans, we'll have to take those on board. It will depend what the spending is on.
Some spending mostly adds to demand. In an environment where the economy's already overheated, that wouldn't be terribly helpful. Other types of spending add to supply and demand. For example, increased immigration adds new workers to the economy. New workers also have new incomes, so you have new shoppers as well. That's an example of a policy that would increase the sustainable growth rate of the economy without creating a lot more inflationary pressure.
We would certainly be looking at what the spending was on in assessing what we needed to do.
As I said, we have a big enough job in monetary policy; we're not here to run fiscal policy.
The one thing I will say there, and this gets back to the previous question, is that we are acutely aware that inflation is particularly hard for low-income Canadians and Canadians on fixed incomes. Governments are concerned about their citizens. Federal and, particularly, provincial governments have been taking measures to try to alleviate the impact of inflation on their citizens.
There, I would suggest that the advice coming out of the IMF is quite good. We know inflation is affecting the most vulnerable members of society. Our job is to get it back down so that that problem gets solved, but through that transition there is a role to help the most vulnerable.
The IMF's advice, which I think is good advice, is to keep those measures targeted and temporary. Keep them targeted on those individuals who really need the help and who are really suffering—lower-income Canadians—and temporary while inflation is high. When inflation comes back down, we don't need those anymore.
Mr. Macklem and Ms. Rogers, thank you both for being here today. We always appreciate your excellent analysis of the economic situation.
Mr. Macklem, you said that inflation had peaked in June at 8.1% and dropped to 6.3% in December. The monetary policy seems to be working, then. According to your projections or scenario, inflation could fall to 3% in the middle of 2023 and reach the 2% target by the end of the year or in 2024.
You and Mr. Baker spoke a bit about risk assessment and forecasts. If your forecast comes true, it would be the ideal situation, almost idyllic. That's what I would call the best-case scenario.
I'd like to hear your thoughts on the risks that come with other scenarios, which I'll get into.
I'll start with this. What are the recession risks right now?
I would also like you to talk about the possibility of U‑shaped inflation. By that I mean inflation that continues to drop but starts to rise again at the end of the year because of a robust labour market and higher-than-expected economic growth internationally. What are the risks of that scenario?
Above all, I would like you to comment on the possibility of inflation holding at 3% or 4% annually, instead of returning to the 2% target, mainly because of the services sector. What are the risks of monetary policy not being able to bring inflation back to the 2% target quickly and inflation staying at 3% or 4%?
In that situation, would you pursue a more restrictive monetary policy at all costs, or would you wait to see how the economy responded in the face of a steady inflation rate of 3% or 4%?
I covered a lot there, so take all the time you need.
You raised a lot of issues.
I think they underscore how important it is to stay humble when it comes to our forecasts.
You asked about risk, so I'll talk about that.
Yes, there are risks, and what I would say to every Canadian is that our job is to try to manage those risks. We don't know what the future will bring. There are always surprises in store, but we endeavour to manage the risks. That's why we are taking a pause at this time. We've done a lot, so we are using this time to assess whether the measures we've taken are enough. We don't want to do too much because that could slow the economy and cause inflation to drop below the target. At the same time, we need to see this through and do our job. If we only do things halfway, we won't reach the 2% target.
Now I'll come back to the risks, starting with the upside risks. Then, I'll talk about the downside risks.
According to our short-term projections, the greatest inflation risk is tied to higher oil prices, which are determined by world markets. In light of China's sudden reopening of its economy, demand for oil could rise. The price of gasoline could increase here, in Canada, as well. At this point, the price of oil has been relatively steady since we released our last estimates, but we understand that oil prices are highly volatile and can change very quickly.
In addition, we are seeing that inflation related to goods prices, especially durable goods, is beginning to ease, but service price inflation is still high. We are forecasting almost no growth for the first three quarters of this year. If that's the case, we think demand will drop and supply will adjust, creating a more balanced situation. Service price pressures will drop. However, there are risks associated with all of that. We haven't seen this situation yet. There is more uncertainty around service prices, and we know that wages will rise by about 4% to 5%. That isn't consistent with 2% inflation, unless there's a really strong boost in productivity, which we haven't seen in recent years.
During the last period, we saw businesses raise prices, with larger and more frequent increases. Price movement distribution has shifted significantly to the right, and we are already seeing that distribution return to normal. When we talk to people in the business community, they tell us that pricing changes will be closer to normal. We are keeping a close eye on whether businesses return to more normal pricing behaviour.
If wage growth doesn't decrease and if businesses don't return to more normal behaviour, it will definitely be harder to bring down inflation. Through our monetary policy, we would probably have to raise interest rates again.
Well, I can speak to it right now.
What are we seeing? If you look at corporate profits, as you indicated, particularly in the energy sector, with much higher global energy prices over the last year, we have seen higher profits in the energy sector. If you look at it more broadly, and this goes a bit to the previous question, what we have seen is that...and I would say that we have learned something from this. What we saw was that with the economy in excess demand, when there were cost pressures, businesses passed those through very quickly to final consumers, and this unfortunately is a symptom of an overheated economy.
When an economy is overheated, when inflation is high and when people see prices of everything going up, it makes it easier for companies to raise their prices, because people can't tell: Is this a generalized increase or is it just this company raising their price?
What we've seen is that, yes, the distribution of price-setting behaviour of companies changed. Price increases were bigger. They were more frequent.
We are starting to see it normalize, and that process of normalization is one of those key things we're watching to evaluate whether we have raised interest rates enough to get inflation back to target, and if we don't see it continue to normalize, we will need to do more.
Welcome, Governor and Deputy Governor.
Governor, in your introductory remarks, you spoke about the imbalance between aggregate supply and aggregate demand. On aggregate supply things, there are things that policy-makers can and should do: encouraging productivity gains in the economy, putting in place policies and increasing the supply of inputs, one of them being labour.
Can you indicate the impact that policies are having on the aggregate supply picture in Canada with regard to labour, namely the implementation of a number of policies, including day care and the Canada child benefit?
As you pointed out, there is tremendous uncertainty in the world.
Geopolitically speaking, the tensions between the U.S. and China, in particular, are clearly continuing to mount. In the short term, we are committed to bringing inflation down to target. Yes, there is a risk that a sudden event could affect supply chains. However, I'd like to talk about the longer-term situation, as I did in December, in British Columbia.
Over the past 20 or 30 years, China's entry into the global economy and its growing supply chains have helped lower the inflation rate, especially for traded goods. It is very likely that that will cease in the future. In fact, the opposite could happen, so we could see more pressure on goods prices for quite a while. That's something we have to take into account when setting a target inflation rate.
From time to time, some suggest that, once inflationary pressure has ended, it may be necessary to raise the inflation target. We think that would be a serious mistake for two reasons.
First, when inflation is low, Canadians can count on the fact that the cost of living will not change significantly. If inflation goes up every year, the rise in the cost of living will be greater.
Second, the situations you described could certainly happen in the future, but a higher inflation target would make it harder to respond to those realities.
You indicated, before, that you'll be keeping an eye on government spending and assessing how various kinds of spending contribute to aggregate demand.
There are a number of examples I might mention. I'll start with two.
One that might count as an expenditure is the government implementing a low-income CERB repayment amnesty, so that folks under the poverty line don't have to pay back CERB debt they owe. There are a lot of folks asking for this. It's reasonable for government to expect that people below the poverty line don't have the money to pay back that debt, anyway. There's a significant investment of resources, at the moment, in chasing that debt. Writing it off would count as an expenditure. I'm curious to know whether that is an expenditure you would see as one that contributes to aggregate demand. I think there are some very good reasons not to see that kind of expenditure in that light.
A second example I'd like to hear your thoughts on is investment in affordable housing. Obviously, that creates some demand in the construction market. There are finite resources there, although there are a lot of people in the trades who are currently unemployed, as well—supply and demand are not always a match there, even in the present moment. While construction resources contribute to demand in the short term, in the medium term and in the long term, they help augment supply to meet demand in housing. Housing people takes them out of market competition for rental apartments or...prospective home buyers who land in one of those suites.
How would the Bank of Canada interpret a large investment, for instance, in creating more affordable housing units or writing off pandemic debt?
Let me start by giving you some ideas about how generally to take on our advice about spending because all members are asking the same question.
We publish a monetary policy report quarterly that tells you all the things we think are affecting inflation, where we think inflation's going to go and how we've arrived at our decision. We've also now started to publish a summary of our deliberations for each decision. If you read the summary of deliberations, you can see exactly what things our governing council discussed as contributing to the path of inflation.
You have a near quarterly update on those things that we think are affecting inflation.
As we've said, our current forecast is based on everything we know, including what we know governments, both federal and provincial, are planning to spend. As those plans change, you'll see us feed those changes into our monetary policy report and into our summary of deliberations.
You always have this opportunity to ask us the question, but you also have a quarterly update on our thinking on this topic.
Thank you for appearing today.
I want to go over your models a little bit. You had mentioned that inflation has been driven, as it usually is, by the fact that demand has outstripped supply.
You had said that you built in the government spending. I assume that you do it based on the government's projection.
In the fall economic statement, they projected 2% in growth. If, in this budget—which is coming up in a couple of weeks—it was more like what this Liberal government has done traditionally, which is a spending increase of 7% to 8%, would that affect your ability to take a pause?
Would that affect inflation? Would that affect your models?
Thank you for being here today, Mr. Macklem and Ms. Rogers. Welcome to the committee.
As I listen to your comments, I'm really glad to see how sympathetic you are to what Canadians are going through. You want to keep this period as short as possible, you are taking measures and you are commending Canadians for the patience and resilience they have shown. That really struck me, so thank you very much.
I pay a lot of attention to the net debt-to-GDP ratio and how we rank against other countries. Canada has to make massive investments in order to be competitive in the global economy. I'd like you to talk about the U.S. Inflation Reduction Act. The Americans are in the process of making choices to best position their economy for the 21st century.
When a government like the U.S. government makes massive investments to ensure its sectors are well-positioned to compete in the economy of tomorrow, what impact does it have on inflation?
That spending won't drive consumer demand up immediately or directly.
What are your thoughts on that?
Thank you very much, Chair.
Thank you, Governor and Deputy Governor, for being here. Thank you for your stamina to endure all of these questions.
I'm going to put my politician hat on.
Many politicians knock on doors often, as I do in my community. This is top of mind: cost-of-living issues, raises in interest rates. People are regularly talking about these things. The conversation we are having is an important conversation in terms of technical details, but it's really out of grasp for regular Canadians.
I want to ask you very directly, in plain language, when people are asking us the state of affairs when it comes to cost of living, making ends meet, paying for things, mortgage payments, what's the message we can deliver to them that they will understand about the future—about things to come—so that we can reassure them things will maybe get better?
There are a few key messages.
The first message is that inflation is coming down. It probably peaked last summer. It was over 8% and it's now a little over 6%. It's coming down. We are very aware that 6% is still too high. Six is better than eight, but 6% is still too high. We are acutely aware that Canadians continue to be harmed by high inflation.
The second message is that the Bank of Canada has responded forcefully. We have raised interest rates rapidly. It's working. It is starting to rebalance the economy. Inflation is starting to come down. Over the course of the next number of months, we expect to see inflation come down considerably, so that by around the middle of this year inflation will be around 3%.
The third message is that at the Bank of Canada, we are committed to getting inflation all the way back to 2%, so that Canadians can count on low, stable and predictable inflation in the future.
Thanks very much, Chair.
Governor, I'll ask for your most concise answers as possible, as I want to leave a minute for my colleague Madame Chatel.
I want to confirm this for folks at home, so that my constituents in Etobicoke Centre or other Canadians who are watching this understand. What I hear you saying, Governor—I'm not trying to put words in your mouth, but I genuinely want to make sure we're very clear with Canadians—is that you've made a projection to the best of your ability of what inflation is going to be. You've taken into account all the various information you take into account to make that projection, including current plans for government spending.
Based on that, you decided to pause interest rate hikes, and you've projected, as you mentioned earlier today, that the inflation rate is heading back very close to target by the end of the year.
Am I adequately summarizing your—
As far as monetary policy is concerned, the key to normalizing price distribution is reducing excess demand.
When the economy is in an excess demand situation and consumers start to anticipate that inflation will be high, the price pattern changes and it's easier to raise prices.
However, the competitive system works much better when we have a better balance between supply and demand. It then becomes more difficult for businesses to raise prices because they stand to lose customers and consumers.
That's why we had to raise interest rates, to better balance supply and demand and also reduce anticipation of inflation. The competitive system will work better, and price setting will normalize.
The Bank of Canada's deputy governor Paul Beaudry is giving a speech today in Alberta, and he will further expand on that.
This panel will be on the Select Luxury Items Tax Act and Bill .
From the Department of Finance, we have Mr. Gervais Coulombe, senior director, excise taxation and legislation, sales tax division, tax policy branch; Mr. David Turner, senior adviser, sales tax division; and Mr. Darren D'Sa, tax policy officer, tax policy branch.
Welcome, and I understand the opening statement will be from Mr. Coulombe.
I am pleased to be here with you today to discuss the progress report that was tabled by the Department of Finance on December 2, 2022, which describes efforts by the department to address issues with the implementation of the Select Luxury Items Tax Act—including a summary of discussions and issues raised by impacted sectors.
In budget 2021, the government announced the introduction of a luxury tax on the sale of aircraft and cars with a sales price over $100,000, as well as on boats with a sales price over $250,000. This tax is calculated at the lesser of 20% of the value above the threshold, or 10% of the full value of the luxury car, boat or aircraft. The luxury tax came into effect on September 1, 2022.
This report addresses the following steps leading to the implementation of the luxury tax: the release of a technical backgrounder for public consultations, as of August 2021; the release of draft legislation for public consultations, as of March 2022; feedback received from stakeholders; internal consultations with CRA, CBSA and other governmental departments; linguistic, bijural and legistic review conducted by the Department of Justice; changes made in response to those public consultations; governmental news releases announcing details on the implementation, which were released in July 2022; an order in council made by the Governor in Council to fix the coming-into-force date of the luxury tax, released in August 2022; the release of draft regulations by the Department of Finance; the administration of the luxury tax by CRA and CBSA since its coming into force; additional measures since that coming into force; and, finally, a list of examples of typical stakeholders who met with finance officials over the last two years.
As detailed in this report, the Department of Finance consulted and discussed with sectors, on many different occasions, in an effort to address issues with the implementation of the luxury tax. Now that the luxury tax is in effect, administration and enforcement are ensured by CRA and CBSA. The first reporting period for the luxury tax ended on December 31, 2022. Taxpayers had until January 31 of this year to file their first return with CRA.
The department will continue to closely monitor the implementation of the tax.
Finally, as officials of the Department of Finance, we make best efforts to remain open and available to stakeholders, so that we can hear and understand any technical concerns they have with respect to the tax system, all while still ensuring that the government's tax policy goals and objectives are met.
This completes my opening remarks. I'm here with my colleagues to answer any questions that committee members may have.
Thank you very much, Mr. Chair.
Just off topic, but since I have the floor, I just note the has not accepted the invitation to come to committee. The governor has been glad to appear every time he's been invited. The only time the Deputy Prime Minister appears is when there's legislation to pass. If the government would like the legislation with the BIA, which is going to come in a few months, to pass smoothly, I think we should probably work on a better working relationship.
Anyway, let's talk about the luxury tax.
Thank you for appearing.
One of the things we heard from stakeholders was the government had not completed an economic impact analysis of the luxury tax. The Parliamentary Budget Officer indicated, just using vessels as an example, about a $2-billion loss of sales over the next five years for vessels. The aerospace sector industry group, just for business jets alone, believe there will be about 750 job losses as a result of the imposition of the luxury tax.
Does the Department of Finance agree with some of these economic analyses? Will that be part of your final report? I understand this first interim report was a little bit more on the implementation, but are these some factors you will be opining on in the next update?
Of course. Fair enough.
I want to note something that would be helpful for the committee, if I could offer some suggestions.
In other jurisdictions that have introduced a luxury tax, some have kept them, some have substantially amended them and some have removed them altogether for various reasons in Europe, and even in the U.S. If there's some discussion in the final report about why some jurisdictions decided to make changes or to abandon them, I think it would be helpful for the committee, and certainly for industry, which, because the government didn't complete its own analysis prior, has been trying to determine what the real impacts are to industry.
It sounds like you have a good open relationship with the various industries. Is that right? Are they sharing their information with you? Are you relying on some of the work they've done to inform the future report?
I'd like to thank the witnesses for being with us today.
I have to mention what a great job all of you in the Department of Finance are doing to help Canadians. You make sure that Canada's tax system is fair and balanced, and that it gives the government the revenue stream it needs to make Canadians' hopes and dreams come true. It also keeps them healthy, as we've seen recently. This would not be possible without your hard work. Thank you very much.
I know you held very broad consultations, and I would like to hear your comments about that.
What are the key comments you received?
What challenges did you face?
How did you respond to them?
I can start answering the question, and then I will turn to my colleagues.
At the bottom of page 1 and the top of page 2 in the report, you will find the main comments received at our consultations on the technical backgrounder. At that point, no detailed legislative proposals had been released yet.
We received a lot of feedback, particularly from people in the aeronautics industry, who pointed out the absence of a business use test. That was part of the feedback taken into consideration when drafting the legislative proposals released for public comments in March of last year.
We also received feedback on the test for improvements made to goods subject to the luxury tax. People in the industries asked us to make sure that subject vehicles, aircraft and vessels sold below the price threshold will never be subject to the technical improvement tax rule. That was part of the feedback we received during consultations.
Mr. Turner, would you like to add something?
Certainly. One of the other themes during consultation and moving the technical paper into legislation was, not surprisingly, bringing additional detail and specificity to all of the concepts, terms and proposals that were included in the technical paper.
The technical paper, given its nature, was presented at a higher level and intended to solicit expert information from participants in the industry itself, and it was effective in doing that. We received information on just how sales of planes, for example, work and how those will work with the proposed definitions. You saw many refinements made to the definitions themselves.
When the legislation was released in draft form in March of last year, the feedback continued, and there was increased request for specificity. Also, additional circumstances were brought forward, which we could then respond to in a fairly technical manner. This is pretty far down in the weeds, but these were the sorts of refinements that were made.
One example of that was that we received feedback from stakeholders regarding sales, the agreements for which were completed before a certain date, and whether those were receiving the appropriate and fair treatment under the taxation framework, so some modifications were made to those rules, which were reflected in the final legislation that this committee considered and studied last summer.
First I'd like to welcome the three witnesses and thank them for being with us. We are finally able to meet. At the last committee meeting before the holidays, a tragic event prevented us from holding this meeting.
Mr. Coulombe, we recognize that you receive orders from the government, in this case the Minister of Finance. You are told to introduce a tax, and you must do it. That's your role. In previous sessions of Parliament, when this tax was introduced, I was surprised and even shocked to learn that there was no economic impact study to go with the introduction of this new luxury tax.
For example, the folks at the Aerospace Industries Association of Canada have said over and over again that they support the principle behind the tax. That's also my political party's position. However, we must keep perverse and negative effects from harming industry to such an extent that they neutralize the original objective to make the rich pay. I'm thinking in particular of the devastating effect that the aerospace industrial cluster had in Quebec and Canada.
When a policy like this is being rolled out, I find it unacceptable that no impact study has been conducted to assess it. It's even more obvious when we think of the sobering example in the United States. They brought in a similar tax in the early 1990s, but then withdrew it precisely because the impact had not been properly evaluated.
The Parliamentary Budget Officer expects that this tax will cause a shift in buyer behaviour.
Is a change in behaviour like this being considered in the impact study you are currently conducting?
Actually, I was expecting the team in charge of the economic aspects and carrying out the study to come report to us and tell us how far along they are. We could have discussed it more thoroughly.
The Parliamentary Budget Officer is expecting a change in behaviour. I would simply like your team in charge of the economic aspects to be advised that we—at least that's my position and the position of the majority of my colleagues here, I believe—we expect that change in behaviour as a result of the tax being introduced to be factored into their study. I'd like you to convey that message to them.
With respect to the aerospace sector, HEC Montréal professor Jacques Roy has done an impact study that takes that aspect into account. I want to make sure you tell your economist colleagues to ensure that aspect is taken into account. We need to see what their position is on this.
We're hearing that in the aerospace sector alone, 2,000 jobs are on the line as a result of the tax as it stands. As far as the impact study is concerned, we need to get an idea of how the department's study stacks up on that.
Thank you very much, Mr. Chair.
I'll start with some honest feedback about the progress report that your department prepared. I have to say I found it disappointing. I think what I had hoped to see in a progress report were some lessons learned from the initial months of implementing the tax. It was very light on that, if there was anything. What it provides is a little bit of history as to how we got to the point of implementing the tax in its current form.
I've heard the answer many times—in terms of the impact of the tax overall, we're to wait for the economic impact study. I am interested to know, given that you've been in the process of implementing the tax now for several months, what you have learned. What kind of friction has there been in the implementation of the tax? What kind of information have you needed from companies, for instance, on the ratio of personal use to business use? What's the reporting regime for that? Is that beginning to come together? I know there were questions before the legislation was passed about what that would look like and how that would be reported. What are the new mechanics that your department has had to adopt to implement the tax as is, and what have you learned in that implementation?
That's what I was expecting to see in the progress report.
The luxury tax is to be remitted on a quarterly basis. Ths first quarter effectively covered the September 1 to December 31 period.
When a quarter is completed, taxpayers have until the end of the following month to file the return with the CRA and to remit the luxury tax revenues to the Receiver General for Canada. The reality is that that process was just completed a couple of weeks ago. As a result, the department has not yet received microdata with respect to how much revenue has been collected by the luxury tax. We will start receiving that information in the near future.
When we look at parallel new tax measures that we have implemented over the years, we see that it takes a few months after we start receiving returns to have a broader sense of the situation, the lay of the land.
That said, we have worked extensively with the CRA and with the CBSA to ensure that those two administrative agencies were providing technical assistance to taxpayers. My understanding is that the CRA website, in particular, includes a list of notices intended for the various audiences, those who have to register under the tax. In that sense, the lessons learned...are likely to continue to have a good working relationship—